Merchant Discount Rate (MDR): Definition and What Merchants Need to Know

What is the Merchant Discount Rate?

The merchant discount rate (MDR) is the fee a business pays to accept debit and credit card payments. It’s usually expressed as a percentage of each transaction (commonly about 1%–3%) and can include a fixed cent amount per transaction. The MDR covers interchange fees paid to the card issuer plus charges from the payment processor and card networks.

Key takeaways

• MDR is the percentage (and sometimes fixed fee) merchants pay to process card transactions.
• Typical MDR ranges from 1% to 3%, but rates vary by transaction type, processor, and card network.
• E-commerce (card-not-present) transactions usually carry higher MDRs than in-store (card-present) sales.
• Merchants can respond to MDR by absorbing costs, adding surcharges (where allowed), or offering cash discounts.
• Debit transactions generally cost merchants less than credit transactions due to regulatory caps on many debit fees.

How payment processing works (brief)

1. Customer pays with card.
2. Merchant’s payment processor routes the transaction to the card network and card issuer for authorization.
3. If approved, funds settle to the merchant’s account minus fees.
4. The MDR is shared among the payment processor, the issuing bank (interchange), and sometimes the card network.

Many processors also offer point-of-sale systems, online checkout tools, mobile payments, and supplementary services such as lending or buy-now-pay-later programs.

Typical fees and example pricing

Fees depend on the processor, merchant size, sales volume, and transaction type. Examples of common pricing models:
* Percentage-based (e.g., 2%–3% of transaction).
* Percentage plus fixed cents per transaction (e.g., 2.9% + $0.25 for online sales).
* Flat monthly fee models (common with some providers or subscription tiers).

Example published rates from a major processor:
* 2.6% + $0.10 per tap/dip/swipe (card-present)
* 2.9% + $0.25 per online transaction (card-not-present)
* 3.5% + $0.10 per keyed-in transaction

Fintech processors (e.g., PayPal, Square, Shopify) often offer simpler, lower-fee structures for small merchants. Traditional bank processors may provide broader services but sometimes at higher rates and with more complex contracts.

Interchange fees

Interchange is the portion of MDR paid to the card issuer (the bank that issued the consumer’s card). It’s a primary revenue source for issuers and varies by card type, merchant category, and transaction risk. The payment processor and card network also take portions of the MDR.

Card type and transaction differences

• Credit vs. debit: Credit card transactions typically incur higher fees. Credit swipe fees average around 2%, while debit fees for large banks have been capped by the Federal Reserve at about $0.21 plus 0.05% per transaction in many cases.
• Card-present vs. card-not-present: Online transactions are considered higher risk and usually carry higher MDRs than in-person transactions where the card and customer are physically present.

Passing fees to customers: surcharges and cash discounts

• Surcharges: In most U.S. states, merchants may add a surcharge (a percentage of the sale) for card payments to offset MDR. State laws vary, and card networks impose rules on how surcharges are displayed and disclosed.
• Convenience fees: These are flat fees sometimes charged for a particular payment channel (e.g., phone or online bill pay) and are treated differently under network rules.
• Cash discounts: Merchants may offer a lower price for customers who pay with cash; this practice is legal in all 50 states.

Merchants should check state regulations and card network rules before implementing surcharges or fees.

Why MDR matters to your business

MDR affects profit margins, pricing strategy, and competitiveness. For low-margin businesses in particular (grocery, convenience, some service industries), card-processing fees can meaningfully reduce profitability. Choices about absorbing fees, raising prices, or incentivizing lower-cost payment methods are important operational decisions.

Practical actions:
* Compare processors and pricing models (percentage vs. flat fee).
* Negotiate rates or seek custom pricing if you have meaningful volume.
* Consider payment methods and checkout flows that reduce chargebacks and fraud (which drive up MDR).
* If appropriate and legal, implement cash discounts or surcharges transparently.

Quick context

Retailers and customers paid an estimated $11 billion in card processing fees in 2022, underscoring the scale of these costs across the economy.

Sources

Organizations and resources consulted for industry practices and fee structures include:
* National Retail Federation (NRF)
* Major payment processors and bank merchant services
* Consumer Financial Protection Bureau (CFPB)
* Card network and state guidance on surcharges and convenience fees