MDR (Merchant Discount Rate)

The merchant discount rate, or MDR, is what a business pays its acquiring bank to take a card payment. It is usually quoted as a share of the sale, sometimes with a flat amount per payment on top. It is taken off before the money reaches the merchant. The UK's Payment Systems Regulator looked at this market and set out what the charge is made of. It is the total a merchant pays an acquirer for card acceptance. That total is made up of interchange, scheme fees and the acquirer's own margin.

That three-part split is the part worth grasping. It shows why talks about MDR so often go in circles. Two of the three parts are not set by the acquirer at all. Interchange is set by the networks and paid on to card issuers. Scheme fees go to the networks. Only the third part, the acquirer's own margin, can really be haggled over. Merchants often assume the whole rate is up for debate. Watchdogs in several markets have stepped in on the first part, with mixed results for what merchants end up paying.

The Three Parts In Detail

Interchange fee is paid by the acquirer to the card issuer each time a card is used. Card scheme fee charges go to whoever runs the card system. They cover both scheme work and processing. The acquirer's own margin covers the rest of its costs and its profit. A merchant paying 1.4% is paying all three, whether or not the bill breaks them out.

Blended Rates Or Cost Plus

A blended rate quotes one figure across a mixed pot of card types. It is easier to plan around, but it hides what moves underneath. The other model, which the PSR calls interchange fee plus plus, passes interchange and scheme fees on at cost for each sale. It then adds a separate acquirer charge. Under cost plus, a merchant sees exactly where the money went. Under a blended rate, a shift towards pricier cards can quietly raise real cost while the headline figure stays put.

What The Law Caps, And What It Does Not

Here is where the country matters a great deal. Regulation (EU) 2015/751 caps interchange per sale at 0.2% for consumer debit and 0.3% for consumer credit within its scope. What it does not do is cap the merchant discount itself. The same law defines that on its own, as a fee paid by the payee to the acquirer. That gap gets missed all the time. Capping one input to a price is not the same as capping the price.

Different Markets, Different Models

India took another road. The Reserve Bank of India's rationalisation of MDR for debit card transactions capped the merchant discount direct. It also split the cap by merchant turnover. Small merchants got a lower ceiling than larger ones, with flat per-sale caps next to the shares. Australia's watchdog has worked instead through interchange benchmarks by card type. Anyone comparing rates across borders needs to check which model applies locally.

Why A Cap May Not Reach The Merchant

Capping interchange cuts one part of the cost. Whether that cut reaches a merchant depends on how its pricing is built. The PSR was blunt on this. On average, small and medium merchants got little or no pass-through of the savings from interchange rules. A merchant on a blended rate is less likely to see a cap flow through than one on cost plus. So it is fair to ask about pricing structure before arguing about the headline number.

What Really Moves The Real Rate

Card mix, channel and place tend to move the real rate more than haggling does. Business and company cards usually carry higher interchange than consumer cards. A card issued outside the local region often costs more to take than a home one. A card-not-present transaction is often priced apart from one taken in person. A merchant whose customer base drifts towards any of the pricier mixes can see real cost climb with no change to its contract.

Passing The Cost To Customers

Whether a merchant may add a fee to cover cards is a legal question, not a business choice. Surcharging rules limit or ban the practice in a number of markets. They allow it with strings in others. The RBI circular, for one, asks banks to see that merchants they sign up do not pass MDR on to customers on debit cards. Rules vary by country, by card type and at times by channel. So this is worth checking market by market.

Cutting Cost Without Only Haggling

Approval rates and routing are the levers merchants use least. A declined sale that has to be tried again costs more than one that goes through first time. A sale sent down a pricey path costs more than the same sale routed well. finera. covers that ground in its piece on local acquiring and smart routing for multi-currency transactions. The point behind it is simple. Real cost per paid sale is a more useful number to manage than the rate on the page.