Table of Contents
- What Is the Merchant Discount Rate?
- Key Takeaways on Merchant Discount Rates
- Understanding the Merchant Discount Rate
- How Payment Processing Works
- How Much Merchants Pay for Payment Processing
- What Is an Interchange Fee?
- Can Merchants Charge Extra for Using a Credit Card?
- Can a Merchant Give You a Discount if You Pay in Cash?
- Do Merchants Pay More When You Use Credit vs. Debit?
- Why Do Merchants Pay Higher Fees for Online Transactions?
- The Bottom Line
What Is the Merchant Discount Rate?
Let me explain the merchant discount rate, or MDR, directly to you. It's a fee that you, as a merchant or business owner, have to pay to a payment processing company whenever you handle debit or credit card transactions. This fee usually comes as a percentage of the transaction amount, and you might hear it called a transaction discount rate or just discount rate.
Key Takeaways on Merchant Discount Rates
Here's what you need to know upfront. The MDR is charged by the processor for your debit and credit card transactions. Before you start accepting cards, you'll set up the service and agree to this rate. Expect it to fall between 1% and 3%. A portion of it goes to the credit card issuer as an interchange fee. You should factor these fees into your business costs and pricing strategies. In most states, you can add a surcharge to card users to offset your expenses.
Understanding the Merchant Discount Rate
If you're looking to accept debit or credit card payments, you first need an account with a payment processing company. These processors act as the middleman between your business and the banks issuing the cards. The MDR is essentially what you pay them for this service. They have solid infrastructures and fee setups to handle all kinds of payments, whether in-store or online. As a merchant, whether local or e-commerce, you'll typically see fees from 1% to 3% per transaction.
How Payment Processing Works
Payment processors make global commerce possible, and they take a cut for it. Beyond basic POS and online services, many now provide extended payment plans, loans, and credit lines. You have options like fintech services from PayPal, Square, or Shopify, or you can go with traditional banks offering processing, such as Chase POS Payment Solutions, U.S. Bank POS Solutions, or Bank of America Merchant Services. Most include e-commerce and mobile processing alongside in-store transactions.
How Much Merchants Pay for Payment Processing
You have plenty of providers to choose from, each with fee schedules that vary by your business size and transaction types. E-commerce deals often come with higher MDR due to extra security needs. For instance, Chase POS Payment Solutions, which claims to be the top processor in the U.S., lists rates like 2.6% plus 10 cents per tap, dip, or swipe; 2.9% plus 25 cents for online; and 3.5% plus 10 cents for keyed-in. They mention custom pricing too. While most charge per transaction, some use a flat monthly fee. Fintech options are usually cheaper, banks pricier. Your fee gets split among the processor, card-issuing bank, and sometimes others. Remember, retailers and customers paid $11 billion in these fees in 2022, per the National Retail Federation.
What Is an Interchange Fee?
An interchange fee, or just interchange, is part of the MDR that the processor pays to the card issuer, usually a bank. Card issuers make money this way, on top of interest from cardholders. These are also known as swipe fees.
Can Merchants Charge Extra for Using a Credit Card?
In most U.S. states, yes, you can charge customers extra for using a card instead of cash, basically passing on some or all of your MDR. This surcharge is often a percentage of the amount, or sometimes a flat convenience fee.
Can a Merchant Give You a Discount if You Pay in Cash?
Absolutely, you can offer discounts for cash payments as an alternative to surcharges. This is legal across all 50 states.
Do Merchants Pay More When You Use Credit vs. Debit?
You generally pay lower fees for debit card transactions than credit. The National Retail Federation notes credit swipe fees average about 2%, while big-bank debit fees are capped by the Fed at 21 cents plus 0.05% of the amount. Small banks' debit cards are exempt from that cap.
Why Do Merchants Pay Higher Fees for Online Transactions?
Credit card companies say online transactions carry more risk since the customer and card aren't physically present. That's why MDR is higher for these 'card-not-present' deals compared to 'card present' in-person ones.
The Bottom Line
Electronic payment networks let customers use various cards, which is convenient for them and helps you sell more as a merchant. You pay the MDR for this setup, and sometimes consumers do too if you build it into prices.
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