What Is the Merchant Discount Rate?

The Merchant Discount Rate Explained in Less Than 4 Minutes

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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.

Learn why payment processors charge the merchant discount rate as well as the different methods used to calculate the merchant discount rate.

Definition and Example of Merchant Discount Rate

The merchant discount rate is the fee, generally calculated as a percentage of the transaction amount, charged to merchants by a payment processor on a debit or credit card transaction.

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
Mid-Qualified Reward 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.

Key Takeaways

  • 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.