Merchant Discount and Interchange

The merchant discount fee (also referred to simply as "discount fee") is paid by a merchant (supplier) to its merchant acquirer/bank or other contracted party for services related to the processing of the merchant's card transactions. 

In a four-party payment system (the Visa and MasterCard models), the merchant discount fee includes interchange, which is a fee paid by a merchant acquirer to the issuing bank (card issuer), plus additional clearing and settling fees. The fee compensates the issuer for the time after settlement with the acquiring bank/merchant bank and before it recoups the settlement value from the end-user. It is also a source of revenue for issuers.

In a three-party payment system (the traditional American Express model), there is no interchange component per se. However, a merchant still pays a merchant discount fee in conjunction with card acceptance.

For more industry terms and definitions, visit the glossary.