# Understanding Merchant Discount Rate: Definition & Key Fees Explained

> **Definition**
>
> The merchant discount rate is a fee that businesses pay to payment processing companies for handling debit and credit card transactions, typically ranging from 1% to 3% of the transaction amount.

## What Is the Merchant Discount Rate?

The merchant discount rate (MDR) is the percentage of each [debit or credit card](https://www.investopedia.com/articles/personal-finance/050214/credit-vs-debit-cards-which-better.asp) transaction that a business pays to process payments. This fee typically ranges from about 1% to 3% of the transaction price and includes things like the interchange fee paid to the cardholder’s bank and other processing costs. MDR affects businesses' pricing decisions and their overall cost management. In some states, merchants are allowed to add surcharges to customer transactions to help offset these processing fees.

### Key Takeaways

*   The merchant discount rate (MDR) is a percentage fee that businesses pay to process credit and debit card transactions.  
    
*   MDR fees typically range from 1% to 3%, covering payment processor services and interchange fees to banks.  
    
*   Merchants may pass MDR costs to consumers through surcharges or offer cash discounts to avoid card fees.  
    
*   E-commerce transactions often incur higher MDR due to increased security risks compared to in-store purchases.  
    
*   Debit card transactions generally incur lower fees for merchants than credit card transactions due to regulatory caps.

## Why the Merchant Discount Rate Matters for Your Business

When merchants and other businesses want to accept payments from debit or credit cards, they must first set up an account with a payment processing company. Payment processors serve as intermediaries between a business and the various banks that issue debit and credit cards. The merchant discount rate is what the business pays for their services.

Payment processors have established systems and fee schedules to support all types of merchant payments. Most local and [e-commerce](https://www.investopedia.com/terms/e/ecommerce.asp) merchants can expect to pay a 1% to 3% fee for payment processing of each transaction.

## Exploring the Mechanics of Payment Processing

Payment processing companies help facilitate commerce worldwide in return for a cut. Besides [POS](https://www.investopedia.com/terms/p/point-of-sale.asp) and online services, many now offer extended payment plans, loans, and lines of credit.

Merchants have various options available for payment processing. They can use [fintech](https://www.investopedia.com/terms/f/fintech.asp) company services, such as [PayPal](https://www.investopedia.com/terms/p/paypal.asp), [Square](https://www.investopedia.com/articles/tech/021017/square.asp), or Shopify. They can also set up payment processing with a traditional bank that offers such services. Among major banks' payment processing services are Chase POS Payment Solutions, U.S. Bank POS Solutions, and Bank of America Merchant Services. Most payment processors offer e-commerce and mobile payment processing in addition to processing for in-store transactions.

### $11 Billion

That's the amount that retailers and their customers paid in credit and debit card processing fees in 2022, according to the National Retail Federation.

## Merchant Costs: Understanding Payment Processing Fees

Merchants and other businesses have numerous payment processing providers to choose from, which offer varying fee schedules depending on the size of the business and types of transactions. Merchant discount rates for e-commerce transactions are typically higher due to added security costs.

For example, Chase POS Payment Solutions, which calls itself the "#1 payment processor in the U.S.," recently posted these rates on its website:

*   2.6% + 10 cents per tap, dip, or swipe transaction
*   2.9% + 25 cents per online transaction
*   3.5% + 10 cents per keyed-in transaction

Chase added that "custom pricing" was also available.

Some payment processors charge a flat monthly fee instead of a fee per transaction. Fintech processors tend to be cheaper, while banks usually have higher processing fees. Although merchants pay one fee, it's usually divided among the payment processor, issuing bank, and sometimes others.  

## What Is an Interchange Fee?

An interchange fee (often referred to as "interchange") is a portion of the merchant discount rate that the payment processor pays to the card issuer used in a transaction, typically a bank. In addition to the interest charged to cardholders, credit card issuers earn money through interchange fees, which are also called "swipe fees."

## Can Merchants Charge Extra for Using a Credit Card?

In most states in the U.S., merchants are allowed to charge customers extra for using a card rather than cash, in effect covering some or all of the merchant discount rate they have to pay on the transaction. This is commonly known as a surcharge and is typically calculated as a percentage of the transaction amount. In some cases, merchants can also charge convenience fees, which are typically a flat amount.

## Can a Merchant Give You a Discount if You Pay in Cash?

Yes, as an alternative to charging more for using a debit or credit card, merchants can give customers a discount for paying in cash. This practice is legal in all 50 states of the U.S.

## Do Merchants Pay More When You Use Credit vs. Debit?

Merchants tend to pay lower fees when the customer uses a debit card rather than a credit card. According to the National Retail Federation, swipe fees for credit cards average about 2%, while "fees for debit cards from the nation's largest banks are capped by the Federal Reserve at 21 cents per transaction plus 0.05% of the transaction amount." Debit cards from small banks, it adds, are exempt from that restriction.

## Why Do Merchants Pay Higher Fees for Online Transactions?

According to credit card companies, online transactions involve more financial risk than in-person transactions, where both the customer and their physical card are on hand. The higher merchant discount rates for online transactions are said to reflect that. In credit industry jargon, these are often referred to as "card present" vs. "card-not-present" transactions.

## The Bottom Line

The MDR is the fee businesses pay to accept debit and credit card payments. Typically ranging from 1% to 3%, it covers processing costs and interchange fees charged by card issuers. Credit card transactions generally cost more than debit card fees, and in most states, merchants can add surcharges for card payments or offer cash discounts instead. While these fees make card payments possible, they also affect how merchants set prices to manage or pass on these costs.

> **Article Sources**
>
> 1.  National Retail Federation. "[Swipe Fees](https://nrf.com/advocacy/policy-issues/swipe-fees)."
>     
> 2.  Chase for Business. "[Accept Payments the Way Your Customers Want to Pay](https://www.chase.com/business/merchant-services/search?jp_cmp=bb/CPS_Brand_Exact_Hardware_SEM_US_All_Standard_NA/sea/p76918695034/TERMINAL&gclid=Cj0KCQjw7uSkBhDGARIsAMCZNJuDkjiPjY4YUWK8-R1Csm2U34Z3th3e4lYkMykY1ysCR688UuFzLXcaAgwvEALw_wcB&gclsrc=aw.ds)."
>     
> 3.  NAPCP. "[Merchant Discount and Interchange](https://www.napcp.org/page/InterchangeDefined)."
>     
> 4.  New York State. "[Consumer Alert: NYS Division of Consumer Protection Alerts Consumers to NY Law Related to Credit and Debit Card Surcharges](https://dos.ny.gov/news/consumer-alert-nys-division-consumer-protection-alerts-consumers-ny-law-related-credit-and)."
>     
> 5.  Consumer Financial Protection Bureau (CFPB). "[What is a convenience fee or pay-to-pay fee?](https://www.consumerfinance.gov/ask-cfpb/what-is-a-convenience-fee-or-pay-to-pay-fee-en-2126/)"
>     
> 6.  VerifyThis. "[Yes, A Restaurant Can Charge Different Prices for Credit Cards and Cash](https://www.verifythis.com/article/news/verify/money-verify/restaurant-can-legally-charge-different-credit-card-cash-prices/536-c1b6d5c6-4a22-409a-99f3-2268ffd3b66f)."
>     
> 7.  GSA SmartPay. "[What Are The Types of Transactions When Placing Your Order?](https://training.smartpay.gsa.gov/training_purchase/lesson06/)"