What is a Merchant Discount Rate (MDR)?

Processing credit cards is a service, and, like any service, there is a cost involved. When asking what is MDR consider the fee charged by the bank that manages your merchant account to process your credit card transactions.

Your merchant discount rate is a fixed percentage based on pertinent aspects of your business such as:

• Volume of business.
• Average amount of sale.
• Whether you process card-present transactions or card not-present transactions,
  or a combination of both.
• MCC (Merchant Category Code)

In addition, the merchant discount rate includes dues, assessments, and interchange fees, all charged by the card brand associations for the privilege of processing their card brand. Also included in your merchant discount rate is the mark-up added on by your credit card processor for the part they play in handling your credit card processing. So basically, when answering what is MDR, it is the percentage the acquiring bank (the bank that manages your merchant account), the issuing bank (the cardholder’s bank), the credit card associations and your processor keep from each credit card transaction you process for your goods or services.

How Do They Come Up With The Percentage Rate?

Each of the points mentioned above make up the risk factors involved in processing your credit card transactions. For example, the discount rate for a business that processes most of their credit card transactions with a swipe of the card through a point-of-sale terminal will usually be lower than the rate for a business that processes a higher number of card-not-present transactions from on-line and telephone sales. Why? Because there is a much higher risk of credit card fraud in card-not-present sales transactions.

Businesses that are classified as high-risk based on their financial stability or the products they sell or the services they offer also should be aware what is MDR. Some high-risk businesses include:

• Companies that sell adult products or provide adult services.
• Companies that provide travel services.
• On-line gambling sites.
• Companies with automated, recurring billing for annual memberships (i.e. on-line dating services, or fitness centers).

These businesses often generate a higher number of chargebacks and other credit card transaction complications, so banks tend to charge them a higher discount rate to cover their increased risk of financial losses.

Discount rates are based on risk factor and each credit card transaction falls into one of the categories that explains what is MDR:

1. Qualified Rate:

A qualified rate is the percentage rate you will pay on transactions involving a regular consumer credit card processed in a certain manner. This is usually the lowest rate quoted, and it’s offered to low risk, brick-and-mortar businesses that process the majority of their credit card transactions as card-present transactions. Internet businesses that process their credit card transactions in an approved manner with all the PCI standards in place for protection against fraud will also often qualify for this rate.

2. Mid-Qualified Rate:

A mid-qualified rate is a slightly higher percentage paid on credit card transactions where the credit card information is keyed in instead of being swiped at a POS terminal. Card brand rewards cards fall into this mid-qualified rate.

3. Non-Qualified Rate:

Any transaction that doesn’t fall into the qualified or mid-qualified rate becomes subject to an even higher non-qualified rate. Specialty rewards cards and cards with no address verification fall into this category, as well as transactions that are not batched out to be settled within a set amount of time.

The way you will be processing the majority of your credit card transactions, answers the question what is MDR . When you process a card that does not fall into your qualified rate, your transaction is downgraded to the next rate. Amusing, isn’t it? You are “downgraded” to a higher rate. But it’s no laughing matter! Be sure you understand the rates attached to each type of transaction to control your credit card fees.