Online transactions are the lifeblood of e-commerce, but understanding the costs associated with them can be complex. Two critical terms that merchants must grapple with are “Interchange” and “Merchant Discount Rates (MDR).” Both play a pivotal role in determining the fees a merchant pays for every online transaction. Let’s delve into each and simplify the jargon for better clarity.

What is Interchange?

The interchange fee is a fee paid between banks for the acceptance of card-based transactions. It’s a small amount, typically a percentage of the total transaction, which the merchant’s bank (the “acquiring bank”) pays to the cardholder’s bank (the “issuing bank”).

Why does it exist?

The interchange compensates the issuer for the risk and cost taken on when clearing and settling an online transaction. It’s essentially the price paid for convenience, ensuring liquidity and security in card transactions.

Factors affecting Interchange:

• Card type: Credit cards usually have higher interchange fees than debit cards.
• Transaction method: Card-present transactions (like those in physical stores) might have different rates compared to card-not-present transactions (like online purchases).
• The issuing bank: Different banks might have slightly different interchange rates.

What is Merchant Discount Rate (MDR)?

MDR is the total fee that a merchant pays for every transaction where a credit or debit card is used. It encompasses several charges, fees, and taxes to process a digital transaction, and it’s shared among three primary players: the bank, the payment gateway, and the card networks (like Visa or Mastercard).

Breaking down MDR:

1. Interchange Fee: As discussed, this goes to the cardholder’s bank.
2. Assessment or Network Fee: This fee is paid to card networks.
3. Processor Markup: This is what the payment gateway or processor charges for its services.

Factors affecting MDR:

• Nature of the transaction: International transactions often incur higher MDRs.
• Business type: High-risk businesses might be charged a higher MDR.
• Volume of transactions: Merchants with higher transaction volumes might be able to negotiate lower MDRs.

The Interrelation

While both Interchange and MDR are fees, their relationship is hierarchical. Interchange is a component of MDR. When merchants get a break-up of their MDR, they will notice that a significant portion is the interchange fee, which goes to the issuing bank. Understanding this distinction and relationship can help merchants make informed decisions when choosing payment gateways or negotiating rates.

Conclusion

In the intricate world of online payments, getting a grasp on terms like Interchange and MDR is invaluable. While they represent costs for merchants, understanding their structure, purpose, and influencing factors can lead to better financial decisions and, potentially, savings in the long run. As the e-commerce landscape continues to evolve, staying informed will ensure merchants are always a step ahead.