Who benefits from MS? Who loses?
Here are the parties involved, along with an example of each:
Credit card issuer - e.g., Chase
Retailer - e.g., Safeway
Gift card issuer - e.g., Metabank
Gift card distributor - e.g., Blackhawk
Gift card network - e.g., Visa
Money order retailer - e.g., MoneyGram
My feeling is the following:
Credit card issuer benefits, because they get their commission regardless of what you buy. They have no idea you are buying gift cards, and they don't care. As long as you aren't using a 5% category, they likely come out ahead.
Retailer probably gets screwed. Paying the credit card processing fee for a rewards card on the entire $500 is a lot, and I can't imagine gift cards being high-margin items to begin with.
Gift card issuer is neutral. They get a part of the $5.95 purchase fee, however they do not get the normal interchange fee that they would expect from people who use the gift card for the intended purpose.
Gift card distributor benefits. They get paid by the merchant who sold the gift card regardless of how it is used.
Gift card network loses out. They do not get the interchange revenue they would have received otherwise, because PIN transactions produce less revenue.
Money order retailer is neutral. They collect the money order fee, but if you use multiple gift cards for one money order, they only collect one fee but they have to pay the swipe fee (which is usually a flat amount for PIN transactions) multiple times.
This is my best guess, based on what I know. I just started thinking about this and decided to put it down in writing. Any corrections or opinions are welcome.