A merchant discount rate is a fee that banks and credit card companies charge to cover the processing of credit and debit card transactions. The merchant and bank usually agree to split the processing costs in some pre-arranged proportion before the merchant can use the processing service.
You probably use your debit card or credit card so often that you don’t think of it as a service, and you probably often wonder why you’re asked "Debit or credit?" when you present your debit card, why your bank replaced your debit card that had a MasterCard logo with one bearing a VISA logo, and why some merchants impose a minimum charge for credit card sales.
The answer comes down to processing fees. Most people assume that the merchant transmits information to the card company and then gets paid electronically. Although the transactions and fee structure is more complicated, the card companies incur costs for this service. Processing fees can include the labour and equipment used for encoding cards and the terminal that lets you swipe or insert your card.
The merchant discount fee is usually stated as a percentage of the total sale. Debit card fees are usually less expensive than credit card fees, and fees for premium rewards cards are usually higher than standard card fees.
For example, a credit card rate chart compiled by the Canadian Federation of Independent Business shows that VISA fees are 1.65% and MasterCard fees are 1.75%, which could explain why your bank replaced your debit card before its expiration. Also, the lowest fee for a Bank of Montreal MasterCard is 1.75%, while the highest is 2.71% for a World Elite MasterCard, or 0.96% more. If a merchant processes $200,000 in sales, this adds up to an additional $19,200. And the card company often charges higher fees for sales over a certain amount.
Smaller merchants often have trouble understanding how the fee structure affects them or how they can lower their costs. So whether you’re a small business owner who accepts credit cards or the patron of one who does, take a few moments to find out what the card company charges for fees for the card you use, and suddenly, the credit or debit question and sign requiring a minimum purchase to use your card make sense.