What Is the Merchant Discount Rate (MDR)?

The Merchant Discount Rate (MDR) represents a fee assessed to businesses by their payment processor for handling credit and debit card transactions. This rate, expressed as a percentage of the transaction’s value, is deducted from the total amount before funds are settled into the merchant’s account. It covers costs associated with the payment infrastructure and the various entities involved in processing a transaction. Understanding the MDR helps businesses manage their operational expenses effectively.

Components of the Merchant Discount Rate

The Merchant Discount Rate is not a single, fixed fee but rather a composite charge made up of several distinct elements, each paid to a different party in the payment processing ecosystem. The largest portion of the MDR consists of interchange fees. These fees are paid by the acquiring bank to the issuing bank, the cardholder’s bank. Interchange fees compensate the issuing bank for various services, including fraud protection, transaction authorization, and the funding of cardholder rewards programs.

Another component of the MDR are scheme fees. These are charged by card networks like Visa, Mastercard, and Discover for the use of their networks and branding. These fees support the infrastructure that facilitates communication between banks and enable the secure routing of transaction data. Scheme fees are a smaller percentage of the overall MDR compared to interchange fees.

The final part of the MDR is the processor markup, also called the acquirer markup. This is the fee retained by the payment processor or acquiring bank for its services. This markup covers the processor’s operational costs, including technology infrastructure, customer support, risk management, and fraud prevention services. The processor markup is the most negotiable part of the MDR.

Factors Affecting Your Rate

Several factors influence the specific Merchant Discount Rate a business pays. The type of card used by the customer plays a substantial role; premium cards, such as those offering extensive rewards or corporate benefits, carry higher interchange fees compared to standard debit cards. This is because issuing banks incur greater costs for these enhanced card programs.

The environment in which a transaction occurs also impacts the MDR. Card-present transactions, where a physical card is swiped or inserted into a terminal, incur lower rates due to reduced fraud risk. Conversely, card-not-present transactions, which include online purchases, phone orders, or mail orders, have higher rates because verifying the cardholder’s identity is more challenging. High-risk industries, due to chargebacks or fraud, may face elevated MDRs.

A merchant’s transaction volume and average ticket size can also influence the negotiated rate. Businesses processing a large volume of transactions or having a high average sale amount may secure more favorable rates from payment processors. Compliance with data security standards, such as the Payment Card Industry Data Security Standard (PCI DSS), is important. Non-compliance can result in additional fees or penalties that contribute to the overall processing cost.

How MDR is Applied

The Merchant Discount Rate is applied to the total value of each credit or debit card transaction a merchant processes. This involves a combination of a percentage of the transaction amount and a fixed per-transaction fee. For instance, if a merchant’s MDR is 2.5% plus $0.10 per transaction, a $100 sale would incur a fee of $2.50 (2.5% of $100) plus $0.10, totaling $2.60.

This calculated fee is then deducted from the transaction amount before the remaining funds are settled into the merchant’s bank account. The payment processor handles this deduction automatically, ensuring the merchant receives the net amount. While the MDR is presented as a single rate, it is the sum of the underlying interchange fees, scheme fees, and the processor’s markup, distributed to the parties involved in the transaction.