Card processing arrives with a host of different fees which are paid to and by different parties of the payment ecosystem. It’s worthwhile for merchants accepting card payments to understand what these fees mean to help them make more informed business decisions.
In this article, we'll spotlight the Merchant Discount Rate (hereafter referred to as MDR) which represents the total cost of processing card payments and it's divided into various costs and fees. We'll explore how these fees are determined when you start collecting card payments for your business as well as the different pricing structures surrounding these fees.
What is MDR?
Processing card transactions involves a complex network of financial institutions, which means that payment data often needs to pass between several parties to ensure that transactions can be performed. MDR (otherwise known as Transaction Discount Rate or TDR for short) is a fee charged to merchants by acquirers for maintaining their merchant account and using payment processing services for credit or debit card transactions. Generally, merchants sign up for the service and then agree with their acquirer on the MDR before beginning to accept card payments.
The MDR is calculated and expressed as a percentage of the transaction amount. MDR rates can vary depending on the size of the business, the types of cards used by the consumer, the value of the transaction (more of this below) among other factors.
How does MDR work?
Although MDR is presented as a single-digit percentage paid to the acquirer, it includes a range of different fees, such as:
- Interchange fees that are charged by the card issuer. Typically, interchange fees take up the biggest proportion out of the overall MDR.
- Card scheme fees that credit card schemes (such as Visa and Mastercard) set for using their payment services. Such fees are mainly defined based on a merchant’s monthly sales volume being processed and the industry they operate in.
- Acquirer markup is paid to the payment service provider that provides acquiring services, either for card present or card not present payments to merchants. Unlike interchange and card scheme fees, the acquirer markup is often fine-tuned between the merchant and their acquirer or payment service provider. (Want to learn more about the different players involved in the transaction flow? Watch our video here).
Types of MDR
The calculation of MDR may differ depending on what the merchant chooses and what the payment service provider can offer, appearing either broken down (a pricing structure known as Interchange ++) or as part of a blended rate.
- Blended MDR (or else, flat-rate MDR) – Merchants charge one rate for every transaction of a certain type (be it domestic, international, etc.) regardless of the interchange rate linked to the transaction amount.
- Interchange ++ MDR – Payment service providers applying this type of pricing structure have a breakdown of the MDR, i.e., consisting of the markup and the card scheme fees on top of the interchange rate.
Now that we've explained what MDR is and the purpose it serves, let's dive into interchange fees and their difference with the blended rate.
What are interchange fees?
Interchange fees are set by and paid to the card issuer by the acquirer whenever a card transaction is completed via a card scheme. The fees paid to the issuer are used to cover the issuer’s cost associated with customer support, system maintenance, fraud mitigation and much more. Interchange fees are determined and reviewed periodically by card schemes.
How are interchange fees determined?
As mentioned above, the interchange fee structure may fluctuate based on a few factors such as the type of business, the type of card used by the customer (e.g., credit or debit card, etc.), where the transaction takes place (online, in-store, over the phone, etc.) and whether the region of the cardholder and the business is the same.
Region classification
Depending on where the two parties involved in the transaction are located, the cost of interchange fees will vary. For example, if you're a business based in Germany, accepting domestic transactions will incur a lower interchange fee than international card payments, which likewise differ per territory. This means that the interchange fee structure will depend on whether the transaction is domestic, intra-regional, or interregional. Here’s a rundown of the different regional transactions:
- Domestic transactions are transactions where the business and the cardholder’s issuing bank are both in the same European country.
- Intra-regional transactions are transactions where the business and the cardholder’s issuing bank are in different EU countries.
- Interregional transactions are transactions where the card is issued outside of the EEA and the business is located within the EU or vice versa.
Transaction type
Card not present transactions have higher interchange fees attached, as they are often considered to bear a higher fraud risk. This is because the cardholder is not physically present during the transaction.
In other words, card payments placed in-store via a POS terminal will normally have a lower interchange cost than online or over the phone transactions. Transactions which have gone through the 3DS2 authentication protocol also have lower interchange fees because of this additional security layer.
Card type and business classification
The type of card used during the transaction also impacts the interchange fee rate. Traditionally, credit cards have a higher fee than, for example, debit cards and prepaid cards. There's also a discrepancy between the fees charged for corporate versus consumer cards, with the latter being less expensive.
When it comes to business classification, card schemes use merchant category codes (MCCs) to classify merchants and businesses by the type of goods or services provided.
The difference between Interchange ++ and blended rate
Now that we’ve analysed what interchange fees are, let’s look at how they fit into the pricing structure. The pricing structure is up to the merchant to choose depending on what their payment service provider can support, with business size playing an integral role in the final decision.
If you want to have a clear and transparent overview your processing costs (i.e., interchange fees, card scheme fees, and acquirer markup), then Interchange ++ would be ideal for you. Alternatively, a blended rate may be a better option if you’re after simplicity.
How does Interchange ++ work?
Interchange ++ is a transparent pricing model that shows a detailed breakdown of the card processing costs into interchange fee, card scheme fee and acquirer markup. This provides businesses with a clear overview of the nature of their card processing costs, which can help them inform their business strategies for maximised revenue.
How does a blended rate work?
The alternative to Interchange ++ is known as the blended rate, meaning that fees do not vary per transaction but are rather fixed. Many businesses prefer this approach, as it is straightforward and simplified.
How emerchantpay can help
It’s important for merchants to understand how MDR and its corresponding fees are set, the best fee structure for their business, and why these fees are indispensable to card payment processing.
As an experienced payment service provider and global acquirer, our team at emerchantpay will offer you strategic 1:1 support and dedicate time to educate you on critical aspects of the payment industry, such as the fees we examined in this article. In this way, we help ensure you have all the information you need to make informed decisions and ultimately make your business thrive.
Find out how we can help you carve out the path to accelerated growth for your business.