Accepting credit and debit cards is a must for modern merchants, but card acceptance quite literally comes at a cost: the merchant discount rate (MDR). This small fee can quietly erode margins, but there are ways to reduce its impact.
The merchant discount rate is the fee charged by your acquiring bank or payment processor for handling credit and debit card transactions. It’s typically expressed as a percentage of the total sale with an added fixed per-transaction fee. When a customer pays $100 by card and your MDR is 2.9%, you receive $97.10 while $2.90 is deducted to cover network and banking costs.
Over the course of thousands of transactions, small changes in this rate can have a major impact. For merchants processing $1 million annually, even a 0.25% reduction in MDR represents $2,500 in recovered profit.
The merchant discount rate consists of three separate components: the interchange fee, the assessment fee, and the processor’s markup.
The interchange fee goes to the issuing bank: the bank that issued the card to your customer. This fee compensates the bank for handling the transaction, managing fraud risk, and funding the cardholder’s rewards programs.
Interchange fees are set by card networks such as Visa and Mastercard and vary by card type, transaction method, and risk level. A chip-and-PIN debit purchase carries a much lower interchange cost than an online purchase with a rewards credit card.
The assessment fee is the card network’s own charge. It’s a smaller, fixed percentage—often around 0.10% to 0.15%—that supports the network’s infrastructure and brand operations. Assessment fees, like interchange, are non-negotiable.
Finally, there’s the processor markup, sometimes called the acquirer fee or service margin. This is the amount your processor adds for facilitating settlements, providing support, and earning profit. Unlike interchange and assessment, this portion is negotiable. Two merchants of similar size and industry can pay very different processor markups depending on how their agreements were negotiated. Here’s one example:
|
Component |
Merchant A |
Merchant B |
|
Interchange |
2.30% + $0.10 |
2.30% + $0.10 |
|
Assessment / Network |
0.14% |
0.14% |
|
Processor Markup |
0.64% + $0.05 |
0.22% + $0.40 |
|
Total MDR |
2.94% + $0.15 |
2.52% + $0.50 |
Understanding this breakdown helps merchants focus their energy where it counts—on controlling the markup, improving their transaction risk profile, and optimizing the card mix they accept.
Not every processor structures the merchant discount rate in the same way. The fee you pay can follow one of several pricing models, each with its own level of transparency, predictability, and potential cost. Understanding these models helps merchants compare offers accurately and choose a structure that aligns with their transaction mix and risk profile.
The simplest model is flat-rate pricing. In this setup, the processor charges a single fixed percentage for every transaction, regardless of the card type or network. For example, a payment provider might advertise a 2.9% + $0.30 rate for all credit card payments. This model is easy to understand and makes costs predictable, which appeals to small businesses or new merchants who value simplicity.
Another model is interchange-plus pricing. Here, the processor passes through the exact interchange and assessment fees set by the card networks, then adds a clearly defined markup in the form of a small percentage and/or a per-transaction fee. For example, your rate might be “interchange + 0.25% + $0.10.” This structure lets you see precisely how much you’re paying the networks versus your processor. It often results in lower overall costs for established or high-volume merchants, though statements can be more complex to reconcile.
Some processors use tiered pricing, which groups transactions into categories, commonly labeled qualified, mid-qualified, and non-qualified. Each tier carries a different rate depending on the card type and how the transaction was processed. A chip debit card might fall into the qualified tier with a low rate, while an online rewards card might land in the non-qualified tier with a significantly higher rate.
A model that some businesses take advantage of is subscription or membership pricing. Instead of paying a percentage-based markup on every transaction, the merchant pays a flat monthly fee to access processing at true interchange rates. This can be especially cost-effective for merchants with consistent high volumes because the markup doesn’t scale with transaction value. However, smaller merchants or those with fluctuating sales may find the fixed monthly cost outweighs the savings.
Each of these pricing structures has a place. The right choice depends on your transaction volume, average ticket size, and the types of payment cards your customers tend to use.
Several factors influence how much you pay in merchant discount fees. Your industry, transaction method, average sale size, and even your chargeback history all play a role.
Each merchant is assigned a Merchant Category Code (MCC) that tells acquirers and networks what kind of business you operate. Some categories, such as travel, subscription services, and online gaming, are viewed as high-risk because they experience more refunds and disputes. These industries often face higher MDRs to offset that risk.
Transaction method also matters. Card-present transactions—those completed in person using EMV chip, tap, or PIN—are generally cheaper because the risk of fraud is lower. Online or card-not-present transactions carry a greater risk of fraud and thus higher fees. Similarly, premium or rewards credit cards tend to have higher interchange rates, while debit cards typically cost less to process.
Your sales volume can also influence your rate. Larger merchants processing consistent high volumes often qualify for volume discounts or lower markups. They also have more leverage to negotiate pricing, since losing a large company as a client represents a substantial loss of revenue for the payment processor.
Finally, compliance plays a role. If a merchant account is terminated due to excessive fraud or chargebacks, that merchant may be placed on the MATCH list or Terminated Merchant File. Many traditional processors won’t work with these merchants, leaving them to negotiate with specialized high-risk processors that often have much higher merchant discount rates.
Some merchants choose to offset payment costs through credit card surcharges. These fees are added to transactions paid by credit card to recoup some or all of the processing cost. The idea is straightforward: if a customer’s choice to pay by credit card triggers higher interchange and network fees, the customer covers that cost instead of the merchant.
The approach has its advantages. It can help preserve profit margins in sectors where card fees consume a meaningful share of revenue, and it aligns costs with consumer choice. However, surcharging also carries drawbacks.
Customers may react negatively to extra fees at checkout, especially if they perceive the charge as hidden or unfair. Poor implementation—such as inconsistent application or lack of disclosure—can damage trust and even violate card-network rules.
Visa, Mastercard, and other networks allow surcharging under strict conditions. Merchants must notify their acquirer and the network at least 30 days before implementation. The surcharge cannot exceed the merchant’s actual processing cost or 3%, whichever is lower. It must apply only to credit card payments, never to debit or prepaid cards, and the surcharge amount must be clearly disclosed before and during checkout as well as on the receipt.
Legal regulations also vary by jurisdiction. In the United States, surcharging is permitted in most states but remains restricted or prohibited in a few, including Connecticut, Maine, Massachusetts, and Oklahoma. Some states allow it with disclosure or cap requirements. Internationally, the European Union and Australia restrict or ban surcharging on consumer cards altogether.
Merchants should also confirm that surcharging is permitted under their processor agreement. Even if local laws allow it, your processor may impose its own conditions.
When done correctly and transparently, surcharging can sometimes offset rising MDR costs, but it always carries the risk of upsetting some customers.
Reducing your processing costs doesn’t necessarily mean changing providers. Many cost-saving opportunities lie in how you process payments and negotiate rates. The most effective strategies include:
When possible, promote debit or ACH payments, which carry lower interchange fees. For online checkouts, offering “pay by bank” options can reduce your card mix without hurting conversions.
Processors value predictability. Merchants with stable volumes, clean compliance records, and low dispute ratios are considered safer and can often negotiate more favorable terms.
Look into the costs of interchange-plus pricing instead of a bundled “flat” rate. This separates the non-negotiable interchange and assessment fees from the markup you can influence. If your volume grows, ask for lower rates or volume-based discounts.
Chargebacks don’t just cost you revenue; they can increase your processing costs over time. Acquirers evaluate merchants partly based on their chargeback ratio—the number of chargebacks compared with total transactions. A ratio above 1% often triggers closer scrutiny or additional reserve requirements.
Merchants with a history of high dispute volumes are viewed as riskier to process. To compensate, acquirers may increase your processor markup, impose rolling reserves, or even reclassify you into a higher-risk pricing tier with a higher MDR. Conversely, maintaining a clean dispute record signals stability and can qualify you for better pricing.
Merchant discount rates and surcharging rules look different around the world. In the European Union, interchange fees are capped at 0.2% for debit cards and 0.3% for credit cards under regulatory limits. These caps have lowered MDRs across Europe but also reduced rewards programs and cardholder perks.
In India, the Reserve Bank regulates MDR for debit cards and UPI transactions to promote digital payments while keeping costs manageable for small merchants. Other regions, such as Australia, also impose limits or transparency requirements on processing fees.
In the United States, there is no interchange cap, so competitive dynamics among acquirers drive pricing. However, the landscape is changing. Legal challenges and proposed settlements between merchants and card networks could alter how swipe fees and merchant costs are structured in the coming years.
While some components of the merchant discount rate are fixed, merchants can still influence the final rate they pay by managing risk, improving transaction quality, and negotiating markup terms.
Surcharging can help offset rising costs but comes with legal and compliance obligations that must be followed precisely. Meanwhile, proactive chargeback prevention and fraud control not only protect revenue but can reduce long-term processing expenses.
The merchants who perform best in this environment are those who treat payment processing as a managed cost center rather than a static utility. By auditing regularly, communicating with your acquirer, and aligning your payment strategy with your risk profile, you can better control and optimize your business expenses.