Merchant Discount Rate (MDR): Full Guide

If you’ve ever read through your merchant account statement, you’ve likely noticed that the entirety of your company’s transactions doesn’t end up in your bank account. Instead, a merchant discount rate (MDR) is pulled from the payments before the final amount is transferred into your merchant account. To maintain your company’s profitability, it’s essential to understand how merchant discount fees work and find effective ways to reduce your MDR.

Read on to learn more about this important payment processing fee and how you can lower your company’s MDR.

TL;DR

• In most cases, the merchant discount rate makes up around 1% to 3% of the transaction cost. 
• The MDR is split between the issuing bank, payment processor, and card network.
• It is calculated based on the interchange rate, assessment fees, and processor’s markup.
• While you can’t negotiate lower interchange or assessment fees, you can negotiate for a lower processor’s markup.
• You can decrease your MDR by negotiating a lower processor’s markup, switching to a different processor, asking for in-person payments, or encouraging customers to pay with methods that cost less.

When working with a new processor, pay attention to hidden fees because these can add up quickly.

What Is a Merchant Discount Rate? 

So, what is the merchant discount rate meaning? At its heart, the merchant discount rate is the fee you pay every time a customer runs a transaction. In most cases, this fee ranges between 1% and 3%.

Payment processing fees make up the backbone of global payment networks. Issuing banks and acquiring banks must verify that the transaction is valid. All of these verification processes, payment processing steps, and other activities cost money, which is why MDR charges exist. These funds help support the payment network, risk management, and payment infrastructure.

The actual amount you end up paying depends on your business type, total transaction volume, processing type, and the card method used during each transaction. This entire process is made up of a few key players that each take a portion of the merchant discount fee to cover their services.

• Acquiring Banks: These banks are responsible for working with the merchant and processing transactions.
• Card Networks: Major card networks, like Visa and Mastercard, set interchange rates and assessment fees. This is the major reason why you can’t negotiate lower interchange rates and assessment fees, but you can negotiate a lower processor’s markup.
• Point-of-Sale (POS) Providers: The POS providers are responsible for your terminal software and hardware.
• Issuing Banks: The issuing bank assumes the credit risk and is in charge of collecting the interchange fees. They are responsible for determining if the customer has a high enough balance to make the purchase. 
• Payment Processors: Payment processors are in charge of providing customer support and technology infrastructure for processing the transaction.

The Components of the MDR

While it is referred to as a merchant discount rate, the MDR isn’t a single fee. Three different components make up the MDR charges that appear on your merchant statement.

• Assessment Fees: Typically, assessment fees are a percentage of your sales. They help to fund payment networks and are given to Visa, Mastercard, or whichever payment network was used for the transaction.
• Interchange Fees: Interchange fees are paid to the card issuer. The issuer is also known as the customer’s bank. This fee helps the card issuer cover fraud detection, rewards programs, processing costs, and other expenses. The actual amount you end up paying can vary significantly based on your industry, the payment method, and the kind of card used. 

Processor’s Markup: The processor’s markup is the amount that is given to your payment processor. Depending on the payment processor, it may be a flat fee, a fixed percentage, or a blend of both.

How Is the Merchant Discount Rate Calculated? 

The merchant discount rate is calculated by adding up the interchange fee, the processor’s markup, and the assessment fee. To calculate your company’s specific MDR, use the following steps.

1. Add up your total spending on interchange fees, processor’s markups, and assessment fees.
2. Add together your total sales volume.
3. Divide the total fees by the total sales volume.
4. To turn this figure into a percentage, multiply it by 100. 

For example, this is the formula you would use for a company that paid $200 in fees on $8,000 in earnings.

($200 / $8,000) x 100 = 2.5%

What Are the Average Merchant Discount Rates? 

The average merchant discount rate is generally between 1% and 3% of the transaction value. How this fee is structured can vary significantly from one payment network to another. The following table includes merchant discount rate examples from major card networks. However, it’s important to note that these examples are weighted based on the card type, so the actual prices charged can vary.

Card Network	In-Person Transactions	Online or Manually Entered Transactions
Mastercard	1.93% plus $0.08 per swipe	2.32% plus $0.25 per swipe
Visa	1.79% plus $0.08 per swipe	2.25% plus $0.25 per swipe
Discover	2.04% plus $0.08 per swipe	2.22% plus $0.25 per swipe
American Express	2.61% plus $0.08 per swipe	3.01% plus $0.25 per swipe

Merchant Discount Rate vs. Interchange Fee

When comparing the merchant discount rate vs. interchange fee, the main difference is that the interchange fee is a part of the merchant discount rate. The interchange fee is one of the three components in the MDR and is paid to the card issuer. 

Unfortunately, interchange fees are not negotiable because they are set by the card issuer. Only the processor’s markup can be negotiated by merchants.

	Merchant Discount Rate	Interchange Fee
What Is It?	This is the fee charged by the merchant’s bank for processing the transaction.	This is a part of the MDR that is paid to the issuing bank.
Who Receives It?	It is received by the acquiring bank and distributed among multiple parties.	It is received by the issuing bank.
Purpose	The MDR covers the cost of payment processing, fraud prevention, risk management, and other payment infrastructure.	The interchange fee is used to cover the issuing bank’s risk, pay for the cost of its card services, and help cover the expenses associated with fraud prevention.
Can You Negotiate It?	Yes, to an extent. You can negotiate the total MDR charges you end up paying.	No. Interchange fees are generally a set amount that is set by the card issuer.

How You Can Lower Your MDR

If you’re struggling to find the cheapest payment processing, start by reviewing your merchant discount rate. Through a few key steps, you may be able to decrease the MDR your company has to pay.

1. Consider Your MDR Pricing Model

Current MDR pricing models include interchange-plus pricing, flat-rate pricing, and tiered pricing. 

• Interchange-Plus Pricing: Interchange-plus pricing is rapidly gaining in popularity, thanks to its transparency and reasonable cost. With this option, you are charged interchange costs and a fixed markup. This method tends to be the most effective for high-volume merchants.
• Tiered Pricing: Tiered pricing is less common because of how expensive it is. 
• Flat-Rate Pricing: Flat-rate pricing is when processors charge a flat rate, regardless of the transaction size or other factors. Stripe, PayPal, and Square are major examples of this type of MDR pricing model, although they also use interchange-plus pricing with larger businesses. Because of its simplicity, this is often the best option for small businesses.

2. Improve Your Transaction Processing

There are a few things you can do to reduce the merchant discount fees you pay. For example, debit cards and ACH payments cost much less than credit cards. Chip transactions also cost less to process than swiped or manually keyed transactions.

3. Adopt Address Verification Service (AVS)

AVS is a method of verifying the validity of the transaction. For instance, you may be asked to key in the customer’s zip code during the credit card transaction. Because AVS helps deter fraud, transactions that use AVS cost less.

4. Encourage In-Person Purchases

As a general rule, in-person purchases end up costing your company less. By encouraging customers to make their purchases in person, you can save your company MDR charges.

5. Conduct an Annual Rate Audit

If you are paying an unusually high merchant discount fee, it pays to shop around. Each year, use your merchant statement to audit the current MDR fees that you’re paying. Compare it to the average merchant discount rate for your industry. Then, use this information to negotiate a lower rate or switch to a different provider.

There are a few things you can do to leverage steeper discounts. If your volume has gone up significantly, you can use the volume increase to negotiate a lower MDR. Similarly, you can often get a lower rate by signing up for a longer contract length.

6. Monitor Hidden Fees

Sometimes, processors slip in hidden fees. You’ll see these listed on your merchant statement as monthly account access fees, PCI compliance, or similar terms. When comparing your current payment processor and prospective payment processors, it’s essential to consider all of the fees involved to get a realistic depiction of the overall cost. 

Final Thoughts

As a merchant, you need to regularly review your merchant account statement to see how much you are paying each month. Some parts of the merchant discount rate can be negotiated, and you can always switch to a lower-cost provider. 

At PayCompass, we ensure our merchant discount rate and other fees are fully transparent. We provide simplified global payment processing, robust chargeback protection, and streamlined payment processing. If you’re concerned about the MDR fees you’re currently being charged, we can help you review your statement and determine the most cost-efficient option for your company’s existing needs.

Learn more about how we can help by reaching out to our team of payment processing specialists today.