What is the Merchant Discount Rate (MDR)?
The merchant discount rate, or MDR, is the rate charged to a merchant for the payment processing of debit and credit card transactions. The service is set up by the merchant, and they must agree or commit to the rate before accepting and/or authorizing debit or credit cards for payment processing.
The merchant discount rate can also be defined as a bank fee charged to a merchant for taking payment from their customers through credit and debit cards for goods or services. The bank can lower the rate as sales of merchants increase. Merchants generally pay a 1% to 3% fee for the processing of payments for each transaction.
Alternatively, the merchant discount rate is also referred to as the transaction discount rate (TDR).
- A merchant discount rate, or MDR, is a rate charged to a merchant for the payment processing of debit and credit card transactions.
- The merchant discount rate is also referred to as the transaction discount rate (TDR).
- MDR is given as a percentage of each sales transaction processed.
Understanding the Merchant Discount Rate
The merchant discount rate sums up all the charges and taxes that electronic or digital payments entail. For example, the MDR can consist of bank fees that are charged to customers and vendors for making payments digitally. In the same way, MDR also includes transaction processing costs that the payment aggregator will pay to virtual or mobile platforms or to banks.
The MDR can also include interchange fees, miscellaneous fees (i.e., cross-border fees, zero-limit fees, etc.), gateway and point-of-sale fees, and assessment fees.
How MDR Works
Traditionally, MDR is given as a percentage of the value of each transaction processed. The rates are dependent on the level of business transactions being processed, the types of cards (debit or credit) used by customers, and the value of the average transaction (also known as average tickets or average sales). Typically, the key component of the discount rate is the interchange fees.
The diagram below can help you to understand the MDR in a less complicated way. Basically, a consumer procures the goods or services of a merchant and makes a payment with their debit or credit card. It can be done using a point-of-sale (POS) device at the physical location of the merchant. The merchant bank charges a fee (MDR).
The MDR fee collected by the merchant bank is then split with the bank that issued the credit card, the payment network (Visa, Mastercard, etc.), and the bank that provided the POS terminal or device.
How Merchant Fees are Determined
The following factors are usually important when merchant processors determine their pricing:
- General risk of the industry
- Mode of card payment processing – internet, terminals, etc.
- Annual credit selling volumes
Importance of MDR and Other Payment Processing Fees
Payment processing fees are crucial to continuously sustain infrastructure and services, which, in effect, encourage global e-commerce. Owing to payment processors, faster transaction processing, and automated point-of-sale systems, various payment options – including credit and debit cards – continue to gain popularity and encourage business activity.
A payment aggregator is a service provider that enables merchants to facilitate digital or e-commerce transactions. They allow merchants to accept credit and debit card payments without creating a merchant account via a bank.
Interchange fees are charges set by the card associations for each form of card transaction.
A merchant processor is a company assigned by a merchant to take care of transactions from different channels, such as cards for merchant acquiring banks.
Charges made to a merchant or cardholder based on their debit or credit card usage. Visa, Mastercard, and Discover each set a minimum, fixed-rate percentage that is paid against the sum of monthly purchases processed with a credit or debit card.
The POS terminal is a device used for handling credit and debit card payments at merchant outlets.
CFI is the official provider of the global Certified Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful: