Yup a small chunk of off the book income which goes straight to cash is worth 10% to them
They are doing this. Also, there are fees from credit card fraud as well to factor in.
I was under the impression that was factored into the 2–3%. Not true?
Merchants are usually liable for fraud losses (both the loss in good or services + a fee imposed by the bank for the privilege...). This is on top of the transaction costs. Those transaction costs do not cover fraud liability or losses.