If you are a small business owner who accepts debit or credit card payments, you may have come across the term “merchant discount rate” and wondered what it means. In simple terms, the merchant discount rate (MDR) is the fee charged by payment processors for processing payment card transactions. In this article, we will explore how the merchant discount rate works and its different types, helping small businesses understand the fees they may incur for accepting card payments.
Understanding the Merchant Discount Rate
The Merchant Discount Rate (MDR) is a fee charged by payment processors to merchants for processing electronic transactions. This fee is typically a percentage of the transaction value and is used to cover the costs of transaction processing, including fees charged by card networks, payment processors, and other intermediaries involved in the payment process. In this article, we will explain in detail how the Merchant Discount Rate works for small businesses.
When a small business accepts electronic payments, such as credit or debit cards, the payment is processed through a payment processor or acquiring bank. The payment processor acts as an intermediary between the merchant and the card network, facilitating the transaction and ensuring that funds are transferred from the customer’s bank account to the merchant’s account.
The payment processor charges the merchant a fee for each transaction processed. This fee is known as the Merchant Discount Rate (MDR) and is typically a percentage of the transaction value. The MDR is used to cover the costs associated with processing the transaction, including fees charged by the card network, payment processor, and other intermediaries involved in the payment process.
For small businesses, the MDR can be a significant cost. Small businesses often operate on tight margins, and the fees charged by payment processors can eat into their profits. To mitigate these costs, small businesses may negotiate lower MDR rates with their payment processors or consider using alternative payment methods, such as cash or check.
The MDR can vary depending on a variety of factors, including the type of card being used, the transaction volume, and the payment processor being used. Credit cards typically have higher MDR rates than debit cards due to the higher risk of fraud associated with credit cards. The MDR can also be higher for transactions processed online, as these transactions are considered to be higher risk than those processed in-person.
When considering payment processors, small businesses should be aware of the different types of payment processing fees that may be charged. In addition to the MDR, payment processors may charge other fees, such as monthly fees, transaction fees, and chargeback fees. These fees can add up quickly, so it’s important to carefully review the terms and conditions of any payment processing agreement before signing up.
Types of Merchant Discount Rates
Here are a few different types of merchant discount rates.
Flat Rate MDR
A flat rate MDR is a fixed percentage of the transaction amount that is charged to the merchant for processing card payments. This type of MDR is usually charged by small businesses or merchants with a low volume of transactions. The flat rate MDR is simple to understand and easy to calculate, which makes it a popular choice for small businesses.
A tiered MDR is a fee structure that is based on the volume of transactions processed by the merchant. The merchant is charged a lower MDR for processing a high volume of transactions, and a higher MDR for processing a low volume of transactions. This type of MDR is commonly used by merchants with a high volume of transactions, such as large retailers.
Interchange Plus MDR
An interchange plus MDR is a fee structure that separates the interchange fee and the acquiring bank’s markup. The interchange fee is the fee charged by the card networks, such as Visa or Mastercard, for processing the transaction. The acquiring bank’s markup is the fee charged by the acquiring bank or payment gateway for processing the transaction on behalf of the merchant. An interchange plus MDR is a transparent fee structure that allows the merchant to see the actual interchange fee and the acquiring bank’s markup separately.
A blended MDR is a fee structure that combines the interchange fee and the acquiring bank’s markup into a single fee. This type of MDR is common for small and medium-sized businesses that process a moderate volume of transactions. The blended MDR is easy to understand and calculate, but it may not be as transparent as the interchange plus MDR.
Cash Discount Program MDR
A cash discount program MDR is a fee structure that allows the merchant to offer a discount to customers who pay with cash or check. The merchant is charged a higher MDR for processing card payments, but they can offset the cost by offering a discount to customers who pay with cash or check. This type of MDR is becoming increasingly popular, especially among small businesses that want to reduce their payment processing costs.
Merchant Discount Rate vs. Per-Transaction Fee
Merchant Discount Rate (MDR) and per-transaction fee are two different ways that payment processors charge fees to merchants for processing credit and debit card transactions. In this article, we will discuss the differences between these two fee structures and their impact on small businesses.
Merchant Discount Rate (MDR) is a percentage fee that merchants pay to their payment processor for each transaction processed through a credit or debit card. The MDR covers the cost of processing the transaction, including interchange fees that the card networks charge for the use of their networks, as well as the payment processor’s own fees for processing the transaction. The MDR is typically a percentage of the total transaction amount and can vary depending on the type of card used, the size of the transaction, and other factors.
On the other hand, a per-transaction fee is a flat fee that merchants pay for each transaction processed through a credit or debit card. This fee is usually charged in addition to the MDR and covers the payment processor’s fixed costs associated with processing the transaction, such as hardware and software fees.
The main difference between MDR and per-transaction fees is how they are calculated and charged. MDR is a percentage-based fee that varies depending on the transaction amount, while per-transaction fees are fixed and charged for each transaction, regardless of the transaction amount.
MDR can be beneficial for small businesses that process high-value transactions, as they can potentially pay lower fees as a percentage of the transaction amount. However, for businesses that process smaller transactions, MDR can be more expensive, as the percentage-based fee can add up quickly. In this case, per-transaction fees may be a better option, as they can provide a more predictable and manageable cost structure.
It’s important to note that some payment processors may offer a combination of MDR and per-transaction fees. In this case, merchants should carefully review their fee structure to determine the most cost-effective option for their business.
Another factor to consider is the type of payment processor used. Some payment processors may offer lower fees than others, while others may offer additional services or features that can benefit small businesses, such as fraud prevention tools or integrated point-of-sale systems.
Small businesses accepting card payments should understand the merchant discount rate and the different types of fees they may incur for accepting debit or credit card payments. By being aware of these fees, small business owners can choose the right payment processing service that offers competitive rates and suits their business needs.