Merchant Discount Rate
The merchant discount rate is the total fee a merchant pays its acquirer or PSP on a card transaction, as a percentage of the amount — the interchange that goes to the issuer, the scheme fees that go to the network, and the acquirer's own margin. "Discount" because the merchant is settled the sale less this amount; "merchant service charge" in UK usage. It is the number the industry's margins hide inside.
- Also known as
- MDR, Merchant service charge, MSC, Merchant fee
- Used at
- every card acceptance contract and statement; regulatory analysis of card costs (the EU's interchange caps were aimed at lowering it); comparisons between acceptance methods
- Binding
- the merchant agreement sets it, as a blend, tiers or interchange-plus; the components beneath it are set by the schemes and regulators
- Typical levels
- 0.3–0.8% for large European merchants on regulated debit and credit; 1.5–2% for small merchants on blends; 2–3.5% in the US, where interchange is higher; over 3% for international and high-risk categories; 0.1–0.3% of it is usually the acquirer's
- Typical composition on a €100 European consumer credit payment on interchange-plus
- €0.30 interchange, €0.05 scheme fees, €0.15 acquirer margin — an MDR of 0.5%; on a US consumer credit card, $1.80 interchange, $0.14 scheme fees, $0.25 margin — 2.19%
- Parties
- the merchant, the acquirer or PSP, the schemes and the issuers whose fees are inside it, and the regulators who cap parts of it
How the merchant discount rate works in practice
A customer pays €100 by card. The merchant's acquirer settles €99.30 and keeps €0.70 — an MDR of 0.7%. Of the €0.70, €0.30 goes to the card's issuer as interchange (the issuer's payment for taking the credit and fraud risk and running the card), €0.05 to Visa or Mastercard as scheme fees, and €0.35 stays with the acquirer as its margin and the cost of the gateway, the risk, the settlement and the statement. The merchant experiences a single 0.7%; the industry experiences three businesses sharing it.
The rate's level is a regulatory and competitive story. The EU capped consumer interchange in 2015 at 0.2% (debit) and 0.3% (credit), which cut European MDRs roughly in half for large merchants and left the acquirer's margin the largest part; the US did not cap credit, so American MDRs are two to four times European ones and the issuers' rewards programmes are funded by them. Competition between acquirers then works on the margin — which on interchange-plus is visible and on a blend is not — and on approval rates and services rather than on the rate alone.
For a buyer of a payments company the MDR by merchant cohort, decomposed, is the revenue model: how much is pass-through, how much is margin, and how much of the margin is a blend that the next procurement round removes.
Example
An online retailer in France processes €50m a year at an MDR of 0.62% on interchange-plus: interchange €0.11m (mostly capped debit and credit), scheme fees €0.02m, acquirer margin 0.12% + €0.05 per transaction = €0.16m — €0.31m in all. Its US subsidiary processes $30m at an MDR of 2.4%: $0.55m of interchange, $0.04m of scheme fees, $0.13m of margin — $0.72m. Same business, same acquirer, five times the cost per euro across the Atlantic, of which the acquirer's share is similar in both. The retailer's finance director, presenting to the board, explains that the difference is the issuers' rewards programmes and the US Congress, and that the acquirer is not the problem.
Common mistakes
- Negotiating the MDR without decomposing it; the acquirer can only move its own part. - Comparing MDRs across countries as if the acquirer's margin were the difference. - A blended MDR quoted for a card mix that does not match the merchant's customers. - Reading a low MDR as a good deal when the approval rate is worse. - Buyers modelling a PSP's revenue on the MDR without netting the interchange pass-through.