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.

Understanding the Merchant Discount Rate

When merchants and other businesses want to accept payments from debit or credit cards, they must first set up an account with a payment processing company. Payment processors serve 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 their services.

Payment processors have well-established infrastructures and fee schedule arrangements in place 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 help facilitate commerce worldwide 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 available for payment processing. They can use fintech company services, such as PayPal, Square, or Shopify. They can also set up payment processing with a traditional bank that offers such services. Among major banks' payment processing services are 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 processing for in-store transactions.

How Much Merchants Pay for Payment Processing

Merchants and other businesses have numerous payment processing providers to choose from, which offer varying fee schedules depending on the size of the business and types of transactions. Merchant discount rates for e-commerce transactions are typically higher due to added security costs.

For example, Chase POS Payment Solutions, which calls itself the "#1 payment processor in the U.S.," recently posted these rates on its website:

• 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

Chase added that "custom pricing" was also available.

While payment processors typically charge for each transaction at the applicable merchant discount rate, some charge a flat monthly fee. Fintech processors typically offer lower costs, and bank processing fees are usually higher. While the merchant may pay a single fee, that fee will typically be split among the payment processor, the credit card issuing bank, and sometimes other parties.

The Bottom Line

Today's electronic payment networks offer customers the option to make purchases using a variety of credit and debit cards. This is a convenience for consumers and an advantage for merchants who want to sell more goods. Merchants pay a fee for the services that make this possible. Consumers may also pay if the merchant builds that fee into the prices it charges.