The Secrets Most Banks Don't Want you to Know
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In Canada each time a credit-card is use as a payment method the Processor must pay a transaction fee and/or percentage rate to the card issuing Bank.  As there are literally thousands of Banks issuing Credit-cards around the world, the Brands (ie: VISA, Mastercard, Discover etc.) organize cards into categories of similar services known as “Card Types.”  Each category or Card Type charges a different rate, depending on the type of rewards or benefits offered.  All Brands have a minimum or “Base Rate” they charge for standard cards that offer not rewards/benefits and the rates increase from their depending on the Card Type category the credit-card is listed in.

In addition to the Bank fees the Processors also pay the a small assessment rate and misc network/transaction fees depending on the country the card is issued from, the type of card used and other conditions set by the Brands and issuing Banks. Collectively, these fees are known as “Interchange Fees” and/or the Processor “Costs.”



(Option #1)

Merchant Discount Rate (MDR) – Merchants agree to pay a Discount Rate for all credit-card transactions processed. (ie: Processors currently pay Banks a minimum of 1.42% on VISA transactions so a seemingly common MDR minimum rate Processors charge Merchants is around 1.7%) In addition to the minimum MDR rate Processors also charge a rewards or “non-qualified” rate for all credit-card offering rewards/benefits. Rather then assign a different rate for each card type Processors offer a blended rate(s). (ie: Actual Rewards Fees change often but usually range from 0.1% to 2.5% and up however the vast majority are 0.1-0.25%.  A common Non-qualified Fee would be 0.5%)  

Since MDR rates are assigned before any transaction ever happen, it is impossible to know which cards/card types will be used. Therefore his method requires Processors to add a buffer within the blended rate and/or charge an “interchange differential” to ensure they do not incur any losses.  (ie: MDR + Non-qualified Fee + Brand/Network and in many cases extra markups are added)


(Option #2)

Cost Plus – The Cost Plus system is much more transparent and simple for Merchants to understand then the MDR as they charge the actual “Costs” the Processor pays “Plus” a fixed percentage rate.  Though seldom used and almost never offered as a payment system, the Cost-Plus system enables the Processor to offer extremely competitive pricing as it knows the actual transaction cost and does not require a buffer.

So basically…

  • Using the MDR system you pay the same rate for every transaction and the Processor’s profits go up and down depending on the Card Types used.
  • Using the Cost Plus system your rate goes up and down depending on the Card Types used and the Processor’s profits stay the same.

…So unlike the MDR, when using the Cost Plus system, Processors knows their costs are covered and can offer Merchants very very competitive rates without risk.