When money is exchanged between a customer’s account and your business account, there’s often a fee involved. With card payments, banks and payment networks take a small percentage called the merchant discount rate (MDR), a combination of fees that can affect your profit margins.

The MDR determines how much of every sale you keep. It’s made up of several small charges, including interchange, network, and processor fees, that together form your total card payment cost. Even a difference of a few tenths of a percent can affect your margins in a significant way. According to one estimate, US businesses paid $224 billion in card acceptance fees in 2023.

Understanding how MDRs work gives you control over your payment costs and profitability. It helps you see where your money goes, how your rate is set, and what you can do to lower it. Below, we’ll explain what the MDR is, how it differs from the interchange fee, what determines it, and how to manage it effectively.

What’s in this article?

• What is a merchant discount rate?
  
• How does a merchant discount rate work?
  
• What factors determine your merchant discount rate?
  
• How do merchant discount rates compare across providers?
  
• How can you manage and lower your merchant discount rate?
  
• How Stripe Payments can help
  

What is a merchant discount rate?

Every card payment your business accepts is accompanied by a merchant discount rate, the total fee businesses pay to process these payments. It’s usually between 1% and 3% of the sale. The MDR covers the chain of companies that help process the transaction. The fee bundles together what’s owed to the issuing bank (the customer’s bank), the card network, and your payment processor.

You might see this fee summarized on your payout statement, although many businesses view it as the difference between total sales and what actually settles in their bank accounts. While it can seem small, the MDR can have a real impact on your margins.

How does a merchant discount rate work?

When customers pay with cards, networks of banks and payment partners coordinate the transaction behind the scenes. The merchant discount rate is the total cost of that coordination.

Although it shows up as a single percentage, the MDR is really three different fees combined:

• Interchange fees: Interchange fees typically make up the largest portion of the MDR. They’re paid to the customer’s card issuer (usually a bank), and they cover the issuer’s risk, rewards programs, and fraud prevention. Interchange rates differ depending on the card type, the industry, and whether the card was used in person or online, but they’re generally a percentage of the sale plus a fixed amount (e.g., 1.8% + $0.10).

• Network (assessment) fees: Network fees are smaller than interchange fees, but they’re usually upwards of 0.1% of the transaction. They’re charged by the card networks to fund their global infrastructure.

• Processor fees: Processor fees vary by provider, and each processor adds its own markup. These pay for the processor that enables the transactions and provides tools, analytics, and support.

For example, on a $100 card sale, $1.90 might go to the issuer (interchange), $0.10 might go to the network, and $0.30 might go to the processor. The total MDR would be $2.30.

All of the deductions happen automatically before funds settle so you never have to make an individual payment. And the MDR applies to the full transaction amount, including sales tax and service charges.

What factors determine your merchant discount rate?

The MDR you pay depends on the kind of payment methods you accept, how you accept them, and what kind of business you run.

Here’s what shapes your MDR:

• Card type: Credit and debit cards each carry their own costs. Typically, debit cards have lower fees while credit cards cost more, particularly those that fund travel or cashback rewards. Corporate or premium cards might charge higher fees, because the interchange fee sometimes helps pay for the perks customers earn.

• How the payment happens: Card-present transactions (where the card is tapped, dipped, or swiped) are less risky and therefore less expensive. Card-not-present transactions, such as online or manually entered payments, have higher fraud risk so networks charge more to offset it.

• Your industry: Businesses are categorized by risk. A grocery store or bookstore might be seen as lower risk than a travel agency or subscription box company that handles recurring payments. If your industry has a history of chargebacks or disputes, your MDR might be higher.

• The card network: Each network (e.g., Visa, Mastercard, American Express, Discover) sets its own fee structure. For instance, Visa and Mastercard customer cards have fees that can range from about 1.0% + $0.05 to 3.5% + $0.10. This broad range of fees makes some businesses selective about which brands of cards they accept.

• Regulation and special programs: Laws cap interchange rates in certain regions. For example, the EU has a 0.3% ceiling on fees for customer cards. Some transactions, such as those related to nonprofits or small-ticket items, can qualify for reduced rates. Check with your processor to see whether there are special programs that might reduce your company’s overall MDR.

Altogether, these factors determine the “shape” of your MDR. Two businesses can run the same $100 charge and pay different amounts, depending on how and where the payment is received and what kind of card is used.

How do merchant discount rates compare across providers?

The overall MDR percentage might look similar across providers, but the math behind each one can vary greatly.

These are the main pricing models you’ll encounter:

• Flat rate: You pay a fixed percentage (e.g., 2.9% + $0.30) for every transaction. It’s predictable and easy to budget for, but that simplicity can mean paying more on debit transactions that might otherwise have lower fees.

• Interchange plus: You pay the exact interchange cost for each transaction, plus a fixed markup (e.g., interchange + 0.5% + $0.25). It’s transparent and can be cheaper at scale, but your costs fluctuate because interchange fees vary by card type and transaction method.

• Tiered pricing: Transactions are grouped into “qualified,” “midqualified,” and “nonqualified” tiers. The lack of transparency can make it difficult to understand what you’re actually paying, which is why many businesses go another direction.

The right model for your business depends on your level of sales (higher-volume businesses might be able to negotiate lower fees), variety of transactions, desire for transparency, and capacity for in-depth financial management.

How can you manage and lower your merchant discount rate?

Every percentage of your merchant discount rate comes out of your profit so it’s in your best interest to create strategies for managing it.

Follow these recommendations to keep your MDR as low as possible:

• Match your pricing plan to your business: A flat rate is great for those that need simplicity, such as a small or fledgling business, while interchange-plus can save you money once you have a consistent volume of sales.

• Negotiate when you can: If your volume or transaction size has grown, you can request a lower processor rate or waived fees.

• Encourage lower-cost payments: Add a direct debit option for large invoices or nudge customers towards lower-cost debit cards or bank transfers with small incentives. These payment methods come with lower fees than credit card payments.

• Prioritize secure, card-present transactions: When cards are swiped, tapped, or dipped in person, the risk is lower. This leads to lower fees, generally.

• Stay compliant and review statements: Maintain Payment Card Industry (PCI) compliance to avoid penalty fees, and check your statements regularly for creeping processor costs or new add-ons.

• Use tools that help refine payments: Some payment providers, including Stripe, can save you money automatically by routing transactions for the lowest-cost processing path or qualifying them for better interchange categories.

When you’re handling thousands of transactions, shaving even a fraction of a percent off your MDR can translate into significant savings.

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