What is a 'Merchant Discount Rate'

The merchant discount rate is the rate charged to a merchant for payment processing services on debit and credit card transactions. The merchant must setup this service and agree to the rate prior to accepting debit and credit cards as payment.

'Merchant Discount Rate'

The merchant discount rate is a fee merchants must consider when managing the overall costs of their business. Local merchants and e-commerce merchants will typically have varying fees and service level agreements. Most merchants can expect to pay a 1% to 3% fee for payment processing of each transaction. Payment processors have well established infrastructures and fee schedule arrangements in place to support all types of merchant payments.

Payment Processing Infrastructures

Payment processing infrastructures help support commerce across the world. Financial technology is helping payments to be processed faster with many companies developing point of sale (POS) services that also offer options for payment plans, loans and lines of credit. Payment processors are at the forefront of technology development in payment processing and their relationships with merchants are key to the infrastructure of commerce.

Merchants have a range of options available for payment processing. They can utilize fintech company services such as Square or Shopify. They can also setup merchant payment processing with a bank directly. Some of the top bank offerings for payment processing include Chase POS Payment Solutions, U.S. Bank POS Solutions and Bank of America Merchant Services. All of these payment processors can also offer e-commerce payment processing.

For merchants the fees and fee agreements involved in an account can be complicated. Merchants have numerous providers to choose from and these providers also offer varying fee schedules. Merchants can expect to pay a processing fee for the deposit, as well as network and interchange fees for obtaining funds from the customer’s account. Merchant discount rates for e-commerce are typically higher due to additional costs for added security. Many businesses will have both local and e-commerce transaction which will vary and also add to the complexity of payment processing costs.

Fee schedules for payment processing are most often charged at a merchant discount rate however some providers may charge a flat monthly fee. If service arrangements include an interchange provider with a bank then the merchant will pay two providers for the transaction. If dealing only with a bank the merchant will typically have a bundled merchant discount rate for the full processing of the transaction. Fintech processors will typically offer lower costs while bank processing fees are typically higher due to the full service consolidation.

Effects for Customers

Electronic payment networks offer customers the option to pay from multiple sources. This is a benefit for customers and an advantage for merchants. Many merchants will require a minimum charge for using an electronic form of payment. This minimum charge helps to support the payment of the merchant discount rate by the merchant.

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