Merchant Discount Rate (MDR): Definition, Types, And How It Works

Merchant Discount Rate (MDR): Definition, Types, And How It Works

Deciphering your monthly payment processing bill is much more involved than it appears at first glance. Payment processors can charge a whole range of different transaction fees, each with its own unique name. A merchant discount rate is one of these fees.  

A merchant discount rate, or MDR, doesn’t actually refer to any type of discount. Merchant discount rates are one type of fee that your business might pay to your payment processor. The fee is a percentage of the transaction amount.

This article will look at everything that your small business needs to know about the merchant discount rate (or MDR). We’ll cover what it means, what it’s comprised of, how it works, and the types of MDR for small businesses.

Let’s delve in.

What Is The Merchant Discount Rate Or MDR?

Electronic credit/debit card processing is the way of the future for small business owners. Consumers are embracing eCommerce for the long haul. This will push online credit card usage past $500 billion for the first time in history.

An increasing number of eCommerce transactions are happening online. So, it’s essential to understand the processing fees that come with this for your small business.

A merchant discount rate is a type of fee that payment processors charge on debit card and credit card transactions. Merchant discount rates are usually between 1-3% of each transaction. However, your payment processing provider should confirm this rate when you set up your account.

Merchant Discount Rate_Value_Infographic

What Is MDR Comprised Of?

MDR was created by payment processors to pass along the costs charged by banks and payment networks. MDR is not to be confused with your interchange fee, assessment fee, or markup fee. In actuality, it’s comprised of all three payment processing fees.

Some payment processors charge a flat rate MDR. Others have a more flexible rate that varies depending on the interchange fee of that particular purchase.

Although MDR is also expressed in percentage form, it is different from interchange rates. The maximum legal interchange rate on debit card transactions is 21¢ + 0.05% of the transaction total. However, MDR may run a bit higher, since it’s comprised of your interchange fee, assessment fee, and markup fee.

Pro Tip: Look for an interchange-plus or flat rate merchant discount rate, so you don’t have any surprises on your monthly bill.

Merchant Discount Rate_Interchange Rate_Infographic

How Does MDR Work?

Contrary to popular belief, your MDR isn’t determined by your merchant bank or acquiring bank. Your payment processor is the entity that ultimately determines what you pay for your merchant discount rate. They do this for every unique transaction, every time a customer makes a purchase at your POS terminal or website.

Of course, there are some variables that impact what you’ll pay for the merchant discount rate on each transaction. Payment service providers will charge different rates depending on how your transaction is processed. 

Keyed-in transactions, where your customer punches in their credit card information, will cost more than swiped cards. Similarly, any sales that your payment processor deems to be non-qualified transactions will have a higher MDR than qualified transactions.

Where your transaction takes place is another variable in determining your merchant discount rate. Electronic payments have one of the lowest MDRs whereas the fees for credit card payments and corporate card transactions vary depending on the card network. The type of card your customer uses at your point-of-sale or website plays a big role.

Types Of Merchant Discount Rates

Merchant discount rates are determined by your payment processor. You’ll see the same pricing structure for MDR that you see for payment processing: tiered, flat rate, and interchange plus. Most payment aggregators like PayPal use a flat rate MDR pricing structure. 

However, the security and individual savings of interchange-plus pricing structures still make them the most desirable option for most small businesses.

That’s because, when using tiered pricing structures, financial institutions can change your fee structure with no prior notice. So, talk to your merchant services provider about their MDR fee structure before you sign a contract. You’ll want to find a provider that offers an interchange-plus pricing program, rather than a tiered structure.

Unlike your merchant discount rate, your individual interchange rate will be determined by your customers’ card network. Credit card companies like Mastercard, Visa, and American Express have different interchange rates per transaction. But don’t confuse your customer’s credit card company with their “card issuer,” which refers to your customer’s issuing bank.

There are an increasing number of regulations being put on payment systems from different entities. However, a growing percentage of customer transactions are being processed online. As such, major financial institutions, including The Reserve Bank of India (RBI), are prioritizing technology integrations. 

The RBI just enabled integrations for credit card users that want to use the United Payment Interface (UPI). Since UPI payments are free for merchants, this will be a big boon for Indian retailers.

The Bottom Line

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Let’s debrief. Your merchant discount rate is comprised of three things: your interchange fee, assessment fee, and markup fee (along with any other fees your payment processor decides to tack on). Your interchange rate factors into how much your small business pays for your monthly merchant account bill. Because of this, it’s an important topic to discuss with any payment service provider that you’re considering working with.

Your payment processor does more than just provide payment gateways. So, we are once again asking you to do your research. Although credit card companies ultimately determine your MDR, your payment processor will decide the bulk of it. That’s because they determine your interchange rate, and your interchange rate is the biggest charge in your MDR.

It’s better to shop around and lock down a payment processor like Payment Depot that has a transparent, membership-based pricing structure giving you access to wholesale processing rates in exchange for the direct costs of interchange. With an award-winning customer service team and a BBB rating of A+, Payment Depot helps merchants save an average of $400 a month on credit card processing. Contact us today to learn more.

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