What is a merchant discount rate (MDR)?

What is a merchant discount rate?

It is the rate a business pays to accept a card payment. Visa explains it this way: "Merchants do not pay interchange reimbursement fees—merchants negotiate and pay a 'merchant discount' to their financial institution that is typically calculated as a percentage per transaction." It adds that merchants "can receive a variety of processing services from financial institutions that may be included in their merchant discount rate."

The Federal Reserve puts it in plain terms. The acquirer charges the merchant a merchant discount, "the difference between the face value of a transaction and the amount the acquirer transfers to the merchant," and it "includes the interchange fee and other fees."

How is MDR different from the interchange fee?

Interchange is paid between banks. It goes to the bank that issued the card. The MDR is what the business pays its own bank or processor. Interchange is one cost inside it. Network fees and the processor's own charge are others.

What is the MDR on flat-rate or interchange-plus pricing?

That depends on how you're priced. On flat-rate pricing, you pay one rate on every card. Stripe's standard US rate is 2.9% + 30¢ per successful domestic card payment. On interchange-plus pricing, the rate changes with each card, because the network costs are passed through. Your processor can tell you the MDR for each card type.

Why does the MDR matter for surcharging?

Visa uses it as the cap. Visa's surcharge Q&A says US merchants "may assess a surcharge on credit card purchases that does not exceed the merchant discount rate (MDR) for the applicable credit card surcharged or 3% whichever is lowest."

For example, a business whose MDR on a card is 2.5% can add at most 2.5%. One whose MDR is 3.4% is held to 3%. Other Visa rules from the same document:

• Credit cards only. Debit and prepaid cards cannot be surcharged, even if the cardholder picks "credit" at a terminal.
• Notice first. Notify your acquirer at least 30 days before you start.
• Disclosure. Show the surcharge at the point of entry and point of sale, and as a separate line on every receipt.
• State law still applies. Visa notes some states prohibit or limit surcharging, so a surcharge is only an option where your state allows it.

How do you find your MDR?

Look at your processing statement or agreement, or ask your processor. Visa's own interchange document says the same: questions about "your merchant discount, or what interchange rates for which you are eligible" go to your financial institution.