Merchants are usually the ones who pay transaction fees, not customers.

And where does the merchant’s money come from? The customers.

So if most customers are using cards the store is making ~2% less money. This will eventually turn into a ~2% price increase to maintain their profit margins. If you pay with a credit card you will get most of this back in rewards, but if you aren’t using a credit card this is just extra cost that you lose.

This is quite different in the EU where there are strict fee limits for credit card transactions so the cost of accepting credit cards is similar to the cost to handle cash. You will also notice that there are basically no credit card rewards in the EU because of this. Canada does have some regulation so isn’t quite as bad as the US is, but in general processing credit cards is more expensive than accepting cash for businesses.

So basically credit card fees cost businesses money, so they raise prices to compensate. If you pay with card you can get rewards to get most of this price increase back. However for those who don’t use cards they just lose this money. It is basically a zero-sum game but you lose if you don’t play. (Especially those who are less wealthy so don’t have good enough credit rating to get a high-rewards credit card.)

This is of course a bit of a simplified view of the situation, not all credit card rewards are directly funded by merchant fees. However at the end of the day the cost of processing cards tends to be higher than the cost of handling cash, so the businesses will have to raise prices to account for that.

I think it would be great if businesses directly passed the cost of accepting cards to customers. That way the customer can decide if the extra cost is worth it for the convenience and rewards. Customers who prefer not to use cards then don’t get an increased price for no benefit.