The merchant discount rate is the fee charged to a merchant by a payment processor for processing payment card transactions. This fee is generally a percentage of the transaction amount.
Definition and Example of Merchant Discount Rate
For example, Chase Merchant Services currently charges a 2.9% merchant discount rate on card transactions.
How Does the Merchant Discount Rate Work?
Payment processors charge the merchant discount rate to cover costs charged by banks and credit card networks as well as to make a profit.
While typically expressed as a single percentage, the merchant discount rate for a particular transaction actually represents the sum of several fees, including:
- Interchange fee: The credit card network (such as Visa, Mastercard, or American Express) sets this fee and the bank issuing the card charges it to the merchant’s bank.
- Assessment fee: The credit card network charges this fee for using its network. These fees are relatively small, amounting to 0.10% to 0.15% of the transaction amount for most domestic transactions.
- Markup fee: A negotiable fee split among the entities involved in the transaction.
In 2011, the Federal Reserve set the maximum interchange fee on a debit card transaction at 21 cents plus .05% of the transaction amount.
Types of Merchant Discount Rates
Payment processors vary in how they calculate merchant discount rates.
While some payment processors use a flat-rate merchant discount rate that accommodates all interchange rates for a given transaction type, other processors use the actual interchange rate as a starting point. Still, other processors set different discount rates based on the type of card used as well as how the card is charged.
Flat-Rate Merchant Discount Rates
Processors that charge flat-rate merchant discount rates charge the same rate for all transactions of the same type, regardless of what the actual interchange rate is on the transaction.
For example, PayPal charges the same merchant discount rate of 3.49% for all domestic PayPal checkout transactions and 2.99% for standard credit and debit card transactions, no matter which credit card is used.
The flat-rate merchant discount rate is often higher for international transactions than for domestic transactions. This is partly because credit card networks’ assessment fees are higher for international transactions.
Interchange Plus Merchant Discount Rates
Processors that use interchange-plus pricing base their merchant discount rate on the actual interchange rate for the transaction, plus a markup.
For example, an in-store transaction paid with a Visa card could have a slightly different merchant discount rate than the same transaction paid with a Mastercard.
Some interchange-plus processors charge a monthly subscription fee.
Tiered Merchant Discount Rates
Tiered merchant discount rates base their pricing on the type of card used as well as how the card is charged. A common tiered structure has three tiers: “qualified,” “mid-qualified,” and “non-qualified,” with each of these tiers being charged an increasingly higher merchant discount rate.
Because the payment processor itself sets the merchant discount rate for each rate classification, the merchant discount rate can be significantly different between, say, a “qualified” transaction and a “non-qualified” transaction.
Here is an example of a three-tiered merchant discount rate structure:
|Rate Classification||Card Type|
|Qualified||Most debit cards and non-reward credit cards|
|Non-Qualified||Federal, state, or corporate cards along with cards that don’t meet certain security requirements|
Merchant Discount Rate vs. Per-Transaction Fee
Payment processors often charge a per-transaction fee in addition to the merchant discount rate.
For example, Chase Merchant Services currently charges a 25 cent fee for online transactions.
|Merchant Discount Rate||Per-Transaction Fee|
|Calculated as a percentage of the transaction amount||Calculated as a standard fee that is the same amount for all transactions|
Criticism of the Merchant Discount Rate
While flat-rate and interchange-plus merchant discount rates are relatively transparent, tiered merchant discount rate pricing structures can be confusing because the processor can charge very different rates based on something as seemingly inconsequential as whether a rewards card or a non-rewards card was used.
- The merchant discount rate is a fee charged to merchants by payment processors on debit or credit card transactions.
- There are often several fees bundled into the merchant discount rate.
- Payment processors differ in how they determine their merchant discount rates, with some using a flat-rate structure and others involving more complex calculations.
- In addition to the merchant discount rate, it is common for payment processors to charge a per-transaction fee.
Chase. "2.90% Flat Rate Pricing and Complimentary Terminal." Accessed Aug. 4, 2021.
State of Nevada Office of the Treasurer. "Credit Card Assessment Fees." Accessed Aug. 4, 2021.
Board of Governors of the Federal Reserve System. "Federal Reserve Issues a Final Rule Establishing Standards for Debit Card Interchange Fees and Prohibiting Network Exclusivity Arrangements and Routing Restrictions." Accessed Aug.4, 2021.
PayPal. "Commercial Transaction Rates." Accessed Aug. 4, 2021.