Payment Processing Fees: Understanding Merchant Discount Rate (MDR) and interchange fees

Accepting card payments is essential for businesses in today's economy, however it does come with a range of different fees and costs that must be understood. As a merchant, it's in your best interest to have an understanding of the Merchant Discount Rate (MDR). This rate breaks down different costs and fees associated with card payment acceptance for your business. 

In this article we'll explore how that fee is calculated as well as the pricing structure options available so you're fully equipped to select the best payment strategy for your business. 

What is MDR?

Processing card transactions requires a complex system of financial institutions, resulting in payment data needing to travel between several parties for successful completion. MDR (Merchant Discount Rate) is the fee merchants pay their acquirers for managing merchant accounts and providing card payment services. After signing up for these services, businesses agree with an acquirer on their particular MDR - which is calculated as a percentage of the transaction amount and varies based on business type, size and associated risk, types of cards used, regions and transaction value.

How does MDR work?

While MDR typically appears as a simple percentage of transaction amount, it is actually comprised of many other fees such as:

• Interchange fees are charged by the card schemes (VISA, MasterCard). Typically, interchange fees take up the biggest proportion out of the overall MDR.
• Card scheme fees are also fees charged by card schemes for using their payment networks. 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 acquirer that provides acquiring services to the merchants. Unlike interchange and card scheme fees, the acquirer markup is a variable percentage that is defined and agreed between the merchant and their acquirer or the payment service provider. 

What are interchange fees?

Every time a transaction is made via a card scheme (Visa, Mastercard, etc.), the acquirer pays the Issuer bank an interchange fee. The merchant then pays the interchange fee back as part of MDR.

How much are interchange fees?

In Europe, interchange fees typically range from 0.3-0.4% of the transaction amount, while in the US, they are around 2%. These fees are determined by card schemes and are non-negotiable. Visa and Mastercard adjust their interchange rates twice a year and provide the most current information on their websites. Interchange rates for Visa and Mastercard in different regions are listed below:

• Visa interchange rates: EU, US, SG, AU, IN
• Mastercard interchange rates: EU, US, AU

AMEX and Discover, among many, which have different policies, do not publish their rates online.

How interchange fees are calculated?

The amount of interchange fee is impacted by multiple factors. The following are the most significant factors and how they influence the fee charged:

1. Card scheme: Different card schemes have varying interchange rates, resulting in different costs for customers who pay using a Mastercard versus a Visa card.
2. Card-present (CP) vs. Card-not-present (CNP): Transactions that are face-to-face (CP) have lower interchange fees than card-not-present (CNP) transactions since the risk of fraud is lower when the card is physically present.
3. Merchant category code (MCC):The Merchant Category Code (MCC) is a four-digit code that is assigned to a business by the credit card networks to classify the type of products or services that the business provides. The MCC helps card issuers determine the appropriate interchange fee to charge for a particular transaction. Different MCCs are associated with different levels of risk and processing costs, which is why interchange fees can vary based on the MCC of the business accepting the payment. For example, businesses such as travel agents, utilities, charities, and streaming services receive lower rates in the US and Australia.
4. Consumer vs. commercial: Interchange fees are higher for commercial cards than those issued to individuals, as well as for credit cards compared to debit cards.
5. Transaction regionality: Domestic transactions are typically less expensive than cross-border transactions.

What do Card scheme fees include?

Card scheme fees are fees charged by the card networks, such as Visa, Mastercard, American Express, and Discover, for the use of their payment networks to process card transactions. These fees are paid by merchants, payment processors, and acquiring banks that participate in the card payment system.

Apart from Interchange fees, the card scheme fees also typically include:

• Assessment fees: This is a fee charged by the card network, typically as a percentage of the transaction value, to cover the costs of operating the payment network. Assessment fees may also include fees for fraud prevention and data security.

• Authorization fees: This is a fee charged by the card network for each authorization request made by the merchant. Authorization fees may be charged as a flat fee or as a percentage of the transaction value.
• Network access fees: This is a fee charged by the card network for access to their payment network. Network access fees may be charged on a per-transaction basis or as a flat monthly fee.

Card scheme fees are an important cost component of the card payment system and can significantly impact the profitability of merchants and payment processors. Merchants and payment processors should carefully analyze the various card scheme fees and work to negotiate lower rates where possible to minimize their costs.

 

What do Acquirer markup fees include?

An acquirer markup fee is a fee charged by the acquiring bank to the merchant for processing credit or debit card payments. The acquirer markup fee includes the following costs:

1. Processing costs: This includes the cost of processing each transaction, such as authorization and settlement fees.
2. Risk and fraud management: This includes the cost of preventing and detecting fraudulent transactions, such as verifying customer information and monitoring transaction patterns.
3. Customer support: This includes the cost of providing customer support, such as handling disputes, inquiries, and complaints related to card transactions.
4. Compliance and regulatory costs: This includes the cost of complying with card network rules and regulations, such as data security standards and anti-money laundering regulations.
5. Profit margin: This includes the profit that the payment processor or acquiring bank adds to their costs to generate revenue.

The acquirer markup fee is typically expressed as a percentage of the transaction amount or as a flat fee per transaction. The fee may vary depending on the type of card used, the transaction amount, and the industry in which the merchant operates. Merchants should carefully review their payment processing contracts to understand the acquirer markup fees and negotiate with their payment processors to get the best possible rates.

What are the types of MDR pricing models?

When considering payment service providers, merchants have the option to choose between a couple of MDR pricing structures. 

• Interchange ++ – this pricing model involves a separate fee for each credit card transaction, which includes the interchange fee charged by the credit card issuer, as well as card schemes fees and the acquirer's markup fee. This model provides transparency to the merchant as they can see the interchange fee charged by the credit card issuer, which is a non-negotiable fee.
• Blended (or flat-rate MDR) – Blended rate pricing model involves a single flat rate for all credit card transactions, regardless of the type of credit card or the interchange fee charged by the credit card issuer. This model is simpler and easier to understand, but it may not be as cost-effective and transparent.

Factors to consider when choosing between Intercharge++ and Blended Rate?

 

When considering a blended rate or Interchange ++ for credit card processing, there are several factors that merchants should take into account, including:

1. Types of cards accepted: Blended rates usually have a higher processing fee than the interchange++ model. So, it's important to consider the types of cards that are typically accepted by the business. If the business often accepts high-cost cards, such as corporate or rewards cards, they may end up paying more in processing fees with a blended rate.
2. Volume of transactions: Blended rates can be a good choice for businesses that process a lower volume of transactions. However, for high-volume businesses, an interchange++ pricing model may offer more cost savings as they can potentially negotiate lower markup fees with their payment processor.
3. Average transaction amount: If the business typically processes high-dollar transactions, they may benefit more from an interchange++ pricing model as the markup fee is charged as a percentage of the transaction amount, which can be more costly with blended rates.
4. Cost predictability: Blended rates can offer cost predictability and simplicity since the fee remains the same regardless of the type of card being used. This can be a benefit for small businesses that may not have the resources to devote to analyzing and understanding complex billing statements.

Overall, when considering a blended rate for credit card processing, it's important to weigh the simplicity of the pricing structure against the potential cost savings of an interchange++ model, taking into account the specific needs of the business. In summary, Interchange++ provides more transparency and potentially lower costs for high-volume merchants, while blended rate provides simplicity and ease of use for smaller merchants.

 

How can payment processors impact the payment processing fee?

Payment processors can impact the payment processing fee in several ways to help reduce costs for merchants, including:

1. Offering tiered pricing: Payment processors can offer tiered pricing based on transaction volume or other factors. This can help merchants qualify for lower rates as they process more transactions.
2. Providing fraud prevention tools: Payment processors can provide tools to help merchants reduce fraudulent transactions, which can result in chargebacks and higher processing fees. Fraud prevention tools may include transaction monitoring, real-time alerts, and identity verification.
3. Streamlining payment processing: Payment processors can streamline the payment processing process by reducing transaction processing times, optimizing the settlement process, and improving the customer experience. This can help merchants reduce the costs associated with payment processing errors or delays.

How Catalystpay can help

Working with an experienced payment provider can make a world of difference in helping merchants understand the intricate fee structures and why setting MDR is essential for successful card payments. At Catalystpay, we know that making sound decisions requires access to knowledge and resources—which is why our team dedicates time to provide personalized support and education about this critical industry information. Contact us to learn more how we can help.