What is the Merchant Discount Rate? 🚀
The merchant discount rate (MDR) is a fee that merchants and other businesses must pay to a payment processing company on debit or credit card transactions. The MDR typically comes in the form of a percentage of the transaction amount. It is also referred to as a transaction discount rate (TDR) or a discount rate.
Key Takeaways 🌟
- The merchant discount rate (MDR) is a fee charged to a business by the company that processes its debit and credit card transactions.
- Before accepting debit and credit cards, merchants must set up this service and agree to the rate.
- The merchant discount rate usually ranges between 1% and 3%.
- Part of the MDR goes to the credit card issuer in the form of an interchange fee.
- Merchants must consider these fees as part of managing their business costs and setting their prices.
- In most states, merchants are permitted to impose a surcharge on debit and credit card users to help cover their added costs.
Understanding the Merchant Discount Rate 📚
When merchants and other businesses want to accept payments via debit or credit cards, they must first set up an account with a payment processing company. Payment processors act as intermediaries between a business and the various banks that issue debit and credit cards. The merchant discount rate is what the business pays for these services.
Payment processors have well-established infrastructures and fee schedule arrangements to support all types of merchant payments. Most local and e-commerce merchants can expect to pay a 1% to 3% fee for payment processing of each transaction.
How Payment Processing Works 🔄
Payment processing companies facilitate global commerce in return for a cut. In addition to point-of-sale (POS) and online services, many now offer options for extended payment plans, loans, and lines of credit.
Merchants have a range of options for payment processing, from fintech services like PayPal, Square, or Shopify, to traditional banks such as Chase POS Payment Solutions, U.S. Bank POS Solutions, and Bank of America Merchant Services. Most payment processors offer e-commerce and mobile payment processing in addition to services for in-store transactions.
The Financial Impact 📈
According to the National Retail Federation, retailers and their customers paid $11 billion in credit and debit card processing fees in 2022.
How Much Merchants Pay for Payment Processing 💸
Merchants have numerous payment processing providers to choose from, offering varying fee schedules depending on the business size and types of transactions. Merchant discount rates for e-commerce transactions are typically higher due to added security costs.
For example, some rates from a leading provider could be:
- 2.6% + 10 cents per tap, dip, or swipe transaction
- 2.9% + 25 cents per online transaction
- 3.5% + 10 cents per keyed-in transaction
Custom pricing may also be available.
What Is an Interchange Fee? 💳
An interchange fee (often referred to as “interchange”) is a portion of the merchant discount rate that the payment processor pays to the card issuer involved in a transaction, usually a bank. In addition to the interest charged to cardholders, credit card issuers earn money through interchange fees, which are also known as “swipe fees.”
Can Merchants Charge Extra for Using a Credit Card? 💵
In most states in the U.S., merchants can charge customers extra for using a card instead of cash, effectively covering some or all of the MDR. This is commonly known as a surcharge and is typically a percentage of the transaction amount. Merchants can also charge convenience fees, which are usually a flat amount.
Can a Merchant Give You a Discount if You Pay in Cash? 🏷️
Yes, instead of charging more for using a debit or credit card, merchants can offer a discount for paying in cash. This practice is legal in all 50 states of the U.S.
Do Merchants Pay More When You Use Credit vs. Debit? 🏦
Merchants generally pay lower fees when the customer uses a debit card rather than a credit card. According to the National Retail Federation, swipe fees for credit cards average about 2%, while fees for debit cards from the nation’s largest banks are capped by the Federal Reserve at 21 cents per transaction plus 0.05% of the transaction amount. Debit cards from small banks are exempt from that restriction.
Why Do Merchants Pay Higher Fees for Online Transactions? 👨💻
Credit card companies argue that online transactions involve more financial risk than in-person transactions, where both the customer and their physical card are present. The higher MDR for online transactions reflects that. In credit industry jargon, this is often referred to as “card present” vs. “card-not-present” transactions.
The Bottom Line 🌐
Today’s electronic payment networks enable customers to make purchases using a variety of credit and debit cards. This convenience benefits both consumers and merchants. However, merchants pay a fee for these services, often integrated into the prices they charge, which can also affect consumers indirectly.
Related Terms: Transaction Discount Rate, Interchange Fee, Swipe Fee, POS Payment, Fintech Processing.
References
- National Retail Federation. “Swipe Fees”.
- Chase for Business. “Accept Payments the Way Your Customers Want to Pay”.
- NAPCP. “Merchant Discount and Interchange”.
- New York State. “Consumer Alert: NYS Division of Consumer Protection Alerts Consumers to NY Law Related to Credit and Debit Card Surcharges”.
- Consumer Financial Protection Bureau (CFPB). “What is a convenience fee or pay-to-pay fee?”
- VerifyThis. “Yes, A Restaurant Can Charge Different Prices for Credit Cards and Cash”.
- GSA SmartPay. “What Are The Types of Transactions When Placing Your Order?”
