Understanding the Merchant Discount Rate

As a merchant, you need to stay on top of new technology, legal requirements, and fees to run a successful business. In this post, you’ll learn about merchant discount rate (MDR) charges, what they are, who has a share in them and how to calculate them.

The MDR is a fee percentage charged to merchants by payment service providers for using their processing services. The merchant agrees to the rate before setting up the payment service. 

The MDR is calculated as a percentage of the transaction amount. But generally, the fee is between 1 and 3 percent for every transaction.

Payment processing fees are important to help sustain payment services and infrastructure, which in turn is the backbone of global eCommerce. Payment processors use the MDR to cover the costs charged by the banks and card networks as well as turn a profit.

Though expressed as a single-digit percentage, it is a combination of different fees, including:

This is a fee set by credit card networks, including Mastercard, Visa and American Express. The issuing bank collects this fee from the acquiring bank. Generally, credit card interchange fees fall between 1.5 percent and 3.3 percent for the different card networks.

Where you fall within the interchange fee range depends on several factors, including: 

• Merchant category – each merchant has a merchant category code that corresponds to their business type. Payment networks charge differently based on this. As such, a restaurant faces different interchange fees than a supermarket. 
• Type of credit card used – different networks have different card types with varied benefits, including purchase protection and rewards. For instance, a Visa Signature Preferred Card has higher fees than a Visa Signature Card.
• Processing method – interchange fees vary depending on whether the card was keyed in, not present (phone or online transactions), or swiped. This is mainly because the risk of fraud varies depending on the method of processing. Card-not-present transactions have higher risks of fraud and chargeback hence higher interchange fees. 

This is a fee credit card networks charge for using their networks. It’s charged based on a merchant’s monthly sales volume processed with their cards. Credit card assessment fees are about 0.14%.

This is a negotiable fee that’s split between entities involved in the transaction. Below is a representation of how a typical 2 percent MDR fee would be split between parties involved. 

Different payment processors calculate MDR differently. Some implement a flat rate MDR that accommodates interchange rates, and others use the actual interchange rates as the base rate.

With flat-rate MDR, merchants charge one rate for every transaction of a certain type regardless of the actual interchange rate based on the transaction amount.

For instance, PayPal has a 3.49 percent MDR for domestic checkouts and 2.99 percent for standard debit and credit card transactions regardless of the card used. Flat-rate MDR is lower for domestic transactions than international transactions.

Payment processors that use this type of MDR base their MDR on the real interchange rate and add a markup.

With this type of MDR, payment processors base their fee on the card type and how the card is charged. Tiered MDR has three categories including non-qualified, mid-qualified, and qualified. They each have different MDRs, with qualified having the lowest and non-qualified the highest.

Tiered MDRs are confusing and can leave some guesswork. For instance, just because a processor considers a transaction on a card ”qualified” today, it doesn’t mean they won’t charge the higher ‘non-qualified’ rate for a similar card transaction in the future.

With Interchange-plus and flat-rate MDR, you need not worry about this since the processor’s markup is always the same. This makes it easier to know how much you are paying and to find the lower-cost option. 

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