What is MDR (Merchant Discount Rate)?
MDR, or Merchant Discount Rate, is a fee charged to merchants for processing credit card or debit card transactions. It represents the cost that a merchant must pay to the acquiring bank for accepting electronic payments from customers.
The MDR is typically expressed as a percentage of the transaction amount and is deducted from the total sale amount before the funds are transferred to the merchant’s account. This rate can vary based on several factors, including the type of card used, the merchant’s industry, and the payment processor.
How is MDR calculated?
Interchange Fee: This is the largest portion of the MDR and goes to the card-issuing bank. It compensates the issuer for the risk involved in approving the transaction.
Assessment Fee: This smaller fee is paid to the card network (e.g., Visa, Mastercard) for using their payment infrastructure.
Acquirer Markup: This is the fee charged by the acquiring bank or payment processor for their services in facilitating the transaction.
Factors influencing MDR
Card Type: Credit cards usually have higher MDRs than debit cards.
Transaction Type: Card-present transactions (in-store) often have lower rates than card-not-present (online) transactions due to lower fraud risk.
Merchant Category: Different industries may have different standard MDR rates.
Sales Volume: High-volume merchants may negotiate lower rates.
Risk Assessment: Merchants in high-risk industries may face higher MDRs.
MDR vs APR
APR stands for Annual Percentage Rate and MDR stands for Merchant Discount Rate. While both MDR and APR are expressed as percentages and relate to financial transactions, they serve different purposes and apply to different parties.
MDR (Merchant Discount Rate):
- Applies to merchants
- Represents the cost of processing card transactions
- Charged on each transaction
- Typically ranges from 1% to 3.5% of the transaction amount
- Impacts the merchant’s revenue from sales
APR (Annual Percentage Rate):
- Applies to consumers or borrowers
- Represents the yearly cost of borrowing money
- Charged annually on outstanding balances
- Can range widely, often from 10% to 30% or more for credit cards
- Impacts the total cost of credit for the consumer
The key difference is that MDR is a cost borne by businesses for accepting card payments, while APR is a cost borne by consumers for borrowing money. Understanding both is crucial for businesses that not only accept card payments but also offer financing options to their customers.
