Merchant Discount Rate (MDR)

How is the Merchant Discount Rate calculated?

The MDR is the sum of three primary components: Interchange Fees, Network Assessment Fees, and the Acquirer Markup. The formula is MDR = Interchange + Assessment + Acquirer Markup. Interchange fees are the largest component, paid to the issuing bank (e.g., 1.51% + $0.10). Assessment fees are non-negotiable fees paid directly to the card networks (e.g., Visa's 0.14% base assessment). The Acquirer Markup is the fee retained by the acquiring bank and processor for their services, risk management, and profit (e.g., 0.35% + $0.15). For a $100 online transaction using a premium card, the total MDR might be 2.89% + $0.25, meaning the merchant receives $96.79 after the $3.21 fee is deducted.

What are the typical ranges for the MDR across different industries?

The MDR varies significantly based on risk, volume, and transaction type. Brick-and-mortar retail typically sees the lowest rates, ranging from 1.3% to 2.7%. E-commerce (Card-Not-Present) is higher due to increased fraud risk, ranging from 1.8% to 3.5%. Restaurants fall between 1.8% and 3.2%. High-risk merchants, such as those in travel, nutraceuticals, or online gaming, can face MDRs of 3.0% to 6.0%+ due to higher chargeback potential and regulatory scrutiny. These ranges reflect the underlying interchange categories, which are sensitive to the card type (rewards cards cost more) and the security method used (chip transactions are cheaper than keyed entries).

What are the common pricing models used to calculate the MDR for merchants?

Merchants are typically offered three main pricing models. The first is Interchange-Plus (IC++), which provides the most transparency: the merchant pays the actual interchange cost plus a fixed processor markup (e.g., IC + 0.25% + $0.10). This is best for mid-to-high volume businesses. The second is Tiered Pricing, which bundles transactions into Qualified, Mid-Qualified, and Non-Qualified tiers. This model is often opaque; advertised low rates (e.g., 1.65%) often apply only to basic debit cards, while rewards cards 'downgrade' to expensive non-qualified tiers (e.g., 3.25%). The third is Flat-Rate Pricing (e.g., Stripe at 2.9% + $0.30), which simplifies costs but is generally 15-25% more expensive than IC++ for established businesses.

How do Assessment Fees differ from Interchange Fees within the MDR?

Assessment fees and interchange fees are distinct components of the MDR, paid to different entities. Interchange fees go to the Issuing Bank to cover their costs and fund rewards. Assessment fees, conversely, go directly to the Card Networks (Visa, Mastercard). These fees cover network operating costs, brand management, and regulatory compliance. Assessment fees are typically much smaller than interchange fees, ranging from 0.13% to 0.15% of the transaction volume, plus various per-authorization and fixed monthly fees (like Visa's Fixed Acquirer Network Fee, or FANF). Unlike interchange, which is highly variable based on card type, assessment fees are generally standardized and non-negotiable.