What is Merchant Discount Rate (MDR)?

For your business to navigate the payment ecosystem, it’s vital to understand the various merchant fees involved in payment processing. 

On this page, we’ll focus on the Merchant Discount Rate (MDR). This is the comprehensive expense linked to processing card payments that include a range of costs and fees. 

We'll also explore the various factors that payment processors consider when determining the MDR, as well as the pricing frameworks linked with these fees.

What is a Merchant Discount Rate?

The Merchant Discount Rate (MDR) is what payment processing companies charge merchants and businesses for debit or credit card transactions. Also known as the Transaction Discount Rate (TDR), or discount rate, it’s usually calculated as a percentage of the transaction amount.

How does a Merchant Discount Rate work?

The MDR is typically shown as a single percentage, but it actually represents the total sum of various fees, including:

• Interchange fee: established by the credit card network (e.g., Visa, Mastercard, American Express), and it's charged by the card-issuing bank to the merchant's bank.‍
• Assessment fee: charged by the credit card network for using its network, ranging from just 0.10% to 0.15% of the transaction amount for most domestic transactions.
• ‍Markup fee: a negotiable fee that gets divided among the different entities involved in the transaction.

The MDR can be adjusted by the bank based on the merchant's increasing sales, with merchants usually paying a fee ranging from 1% to 3% for processing each transaction.

These rates vary based on factors such as the volume of business transactions processed, the type of cards used by customers (debit or credit), and the average transaction value (also known as average tickets or average sales). Interchange fees form a significant component of the discount rate.

So, when a consumer buys goods or services from your business and pays with a debit or credit card, the transaction can happen using a point-of-sale (POS) device at your business’s physical location. In this process, the merchant bank imposes a fee known as the MDR.

Then, the MDR fee gathered by the merchant bank is typically divided among several parties involved in the transaction process. This includes sharing portions of the fee with the bank that issued the credit card used for the transaction, the payment network (such as Visa or Mastercard), and the bank that supplied the POS terminal or device used for processing the payment.

How to determine a Merchant Discount Rate

To calculate your MDR, you divide the total fees that your business pays your acquiring bank for the transactions on one card network by the total sales volume carried out on the same card network.

Meanwhile, when it comes to determining pricing tiers, merchant processors typically consider the following factors:

• Overall industry risk assessment.
• Method of card payment processing, such as internet transactions or terminal-based payments.
• Annual credit sales volumes are a significant metric in pricing evaluation.

While payment processors commonly charge for individual transactions based on the merchant discount rate, some processors provide a fixed monthly fee. Generally speaking, fintech processors present lower costs, whereas bank processing fees tend to be higher. 

Types of Merchant Discount Rates

Your MDR will be calculated differently depending on your chosen payment processor. For example, some use flat rates that rely on interchange fees – others leverage interchange rates as the base fee, while others offer tiered pricing.

Flat-rate pricing

This is a straightforward pricing model where merchants pay a fixed percentage or fee for every transaction, regardless of the type of card used or the specific transaction details. It's simple to understand but might not always be the most cost-effective for high-volume or large transactions.

Interchange plus pricing

This method involves charging you, the merchant, the actual interchange fee set by the card networks (Visa, Mastercard, etc.) along with an additional markup or a fixed fee by the payment processor. It's transparent, as merchants know the exact cost of the interchange fee and the processor's markup, but it might be more complex to calculate.

Tiered pricing

In this model, transactions are divided into categories or tiers based on criteria like the type of card used, transaction volume, or processing method. Each tier has its own rate, usually qualified as "qualified," "mid-qualified," or "non-qualified." It can be simpler but may lead to higher costs if many transactions fall into higher-cost tiers.

Blended-rate pricing

This method combines different types of transactions into one average rate. It doesn't differentiate between types of cards or transaction details, offering simplicity but potentially resulting in merchants paying higher fees for certain transactions.

Subscription-based pricing

Merchants pay a monthly or annual subscription fee to the payment processor in exchange for processing transactions at a lower rate or without additional per-transaction fees. It can be beneficial for high-volume businesses but might not suit those with sporadic transaction volumes.

What pricing model does Checkout.com offer?

Checkout.com offers the transparent interchange++ pricing model, charging for transactions separately to ensure there are no concealed or extra expenses.

Interchange fees are inevitable. But that doesn’t mean you can’t leverage them to help your business make informed decisions about growth. That’s where we can help.

As your payments partner, we’ll empower your business with the transparency and insights from interchange++, helping you save money and make data-driven choices. For more information on our pricing model, check out our payment processing page, or contact our team today.