Visa/MC are doing the conversion, and that does makes sense to me given their central position in the transactions. There are (basically crooked) originating (I think that's the right word) banks/payment processors that convert it for you, with a 3% plus spread. Paypal is the most egregious in this category.

The rewards are funded by the banks via interest income. 3% cashback cannot be covered by interchange fees, for instance.