Merchant Discount Rate is the charge that is paid by a merchant establishment for every transaction that a customer pays for by swiping a credit card or a debit card.
Factors that determine the rate
The discount is calculated as a percentage of the value of the transaction. The percentage depends upon the volume of transactions, the value of the individual transaction, the nature of the merchant’s business and the type of card used. Generally, the merchant discount rate varies between 1% and 3% of the transaction value.
Rationale
The rationale for the charge is that, had it not been for the card payment facility, the merchant establishment would not have clinched the sale. The credit card industry players, therefore, look to share in the profit from the transaction. Further, in the case of credit cards, the cost of free credit to the card holder has to be made good by the card issuing bank. Merchant establishments usually claim and are reimbursed the value of the transaction within 3/4 days.
Who are the beneficiaries
The merchant discount rate is shared among the card issuing bank which collects 80% of the rate, the bank that provides the card swiping (POS) terminal which gets 15%, and the balance of 5% goes to the card issuing company.
