A Discount Rate – or Merchant Discount Rate (MDR) – is a percentage-based fee required for processing a merchant’s credit card or other related sales transaction that is paid to an acquiring bank and the credit card processing organization for the time and expense that is involved in the handling of any electronic transaction. The use of a merchant’s account by the bank is essentially what the small percentage covers. The fee also covers dues, assessments, network charges, provider profit mark-ups and the interchange fee, which is a fee that a merchant’s acquiring bank pays a customer’s issuing bank when merchants accept cards using card networks for purchases.
Discount Rate percentages are usually determined by the type of business and which scenario the credit card is processed. Live in-store retail transactions, in which a credit card is present, will always retain a lower discount rate than a transaction that takes place through the mail, over a telephone or online transactions in which the credit card absent because of the higher fraud risk. Other factors, such things as whether a card is keyed with or without an AVS code or whether the card is a rewards or corporate card influence that actual rate.
Typically, the discount rate of all sales transactions owed to the bank by a merchant for credit card processing is a small percentage. If the discount rate is 2.35%, for example, the discount rate fee paid to the acquiring bank is $2.35 for a sales charge of, say, $100.00. There different discount rates for each transaction type are Qualified, Mid-Qualified and Non-Qualified. Mid-Qualified is higher than Qualified and Non-Qualified is higher than Mid-Qualified.
A qualified rate is the percentage rate that a merchant is charged whenever that merchant accepts a traditional consumer credit card and processes it in a standard manner defined determined by their merchant account provider employing an approved credit card processing solution. This is typically the lowest rate that a merchant will incur when accepting a credit card for sales transaction. The qualified rate is also the rate commonly quoted to a merchant when they inquire about pricing from the bank. The qualified rate is based on the way that a merchant will accept a majority of their credit cards and bank cards. For example, a physical brick-and-mortar retailer that has only traditional terminal-swiped transactions will be defined as Qualified. There is very little fraud risk in this case.
For an online merchant, the internet interchange categories will be defined as Non-Qualified, which is a higher fraud risk without a cardholder’s physical presence.
A Mid-Qualified Rate – also called as a partially qualified rate – is
the percentage rate that a merchant is charged whenever they accept a
credit card that does not qualify for the lowest rate. This may happen
for a number of reasons such as:
A customer credit card is keyed into a credit card terminal instead of being magnetically swiped or a special rewards card (which account a sizeable number of transactions) or business credit card is used.
A mid-qualified rate is always higher than a qualified rate. Some of the transactions that are usually grouped into Mid-Qualified can cost the provider more in interchange costs, so the merchant account providers markup these rates.
The Non-Qualified rate is the highest percentage rate that a merchant is charged whenever they accept a credit card. Virtually all transactions that are not qualified or mid-qualified will be this rate. The Non-Qualified rate emerges for several reasons that include: a customer credit card is keyed into a credit card terminal instead of being magnetically swiped and an address verification is not made; a special rewards card or business credit card is used and all required fields are not entered; a merchant does not settle their daily credit card batch within a specified time frame from the initial point of authorization.
Non-Qualified rates can be dramatically higher than qualified rates and can cost the merchant provider significantly more in interchange costs, so the merchant account providers do indeed mark-up these rates.