Acquiring economics: pricing a merchant, MDR and the acquirer P and L

Acquiring economics is the business of making money from processing card payments for merchants, and it is a thin-margin business where a small pricing error can turn a profitable merchant into a loss. The acquirer earns the merchant discount rate, known as the MDR, and pays out interchange to the issuer, the scheme fee to the scheme, and the processing cost to its own operations. What is left is the acquirer margin, and that margin must cover the sales cost, the risk cost, the support cost, and the profit. A business analyst who works in acquiring must be able to build the profit and loss for a merchant, because that is how pricing decisions are made. Why acquiring economics matters is that the margin is small and the risks are large. A typical MDR for a small merchant in the United Kingdom is around 1.5 percent, of which interchange might be 0.3 percent, the scheme fee 0.1 percent, and the processing cost 0.2 percent, leaving a margin of 0.9 percent. On a merchant processing GBP 10,000 a month, that margin is GBP 90, which must cover the sales cost, the risk, and the support. If that merchant has a single chargeback of GBP 500 that the acquirer must cover, the margin for five months is wiped out. This is why acquirers price by risk, why they hold reserves, and why they monitor the chargeback ratio so closely. The parties are the merchant, the acquirer, the issuer, the scheme, and the payment service provider if one is involved. The merchant pays the MDR. The acquirer collects it, pays interchange to the issuer, pays the scheme fee to the scheme, and keeps the remainder. The payment service provider, if it sits between the merchant and the acquirer, takes a share of the margin for providing the gateway or the terminal. The scheme sets the interchange and the scheme fee. The issuer receives the interchange. Each party in the chain must earn enough to cover its costs, and the MDR is the total that the merchant pays for the whole chain. In practice the acquirer profit and loss for a merchant is built from six lines. Revenue is the MDR multiplied by the merchant volume. Interchange cost is the interchange rate for the card types the merchant takes, multiplied by the volume. Scheme fees are the scheme fee per transaction multiplied by the number of transactions. Processing cost is the cost of the gateway, the terminal, and the settlement. Risk cost is the expected chargeback loss, which is the chargeback rate multiplied by the volume and the average transaction value, plus the cost of the reserve. Operating cost is the sales, support and compliance cost allocated to the merchant. Profit is revenue minus all five costs, and the acquirer will only board a merchant if the expected profit is positive after allowing for the risk. A worked example shows the numbers. A merchant processes GBP 100,000 a month, 2,000 transactions at an average of GBP 50. The MDR is 1.5 percent, so revenue is GBP 1,500. Interchange averages 0.3 percent, so the cost is GBP 300. Scheme fees are GBP 0.05 per transaction, so the cost is GBP 100. Processing costs GBP 0.10 per transaction, so the cost is GBP 200. The chargeback rate is 0.5 percent, so 10 chargebacks a month, and the average chargeback value is GBP 50, so the expected loss is GBP 500, plus GBP 15 per chargeback in fees, which is GBP 150, a total risk cost of GBP 650. Operating cost allocated is GBP 100. Total costs are GBP 1,350, leaving a profit of GBP 150, which is a margin of 0.15 percent. If the chargeback rate rises to 1 percent, the risk cost doubles to GBP 1,300, and the merchant becomes loss-making. What happens when the economics are wrong is a loss that is often discovered too late. If the acquirer underprices a merchant, it loses money every month until the pricing is corrected, and correcting the price may lose the merchant. If the acquirer overprices, the merchant leaves for a competitor, and the acquirer loses the volume. If the acquirer does not monitor the chargeback rate, a merchant that was profitable can become loss-making without anyone noticing until the quarterly review. The finance team must review the profit and loss for every merchant at least quarterly, and the risk team must review any merchant whose chargeback rate is rising, because a rising rate is the earliest warning. The operational and accounting implications are that the finance team must build a profit and loss for each merchant, the pricing team must set the MDR based on that profit and loss, and the operations team must monitor the actual costs against the forecast. On the ledger, the MDR is revenue, interchange and scheme fees are costs, chargebacks are a cost, and the reserve is a liability. The accounting team must also track the payment service provider share, if any, because that is a cost that is often overlooked in the pricing model. The most common accounting error is to book the MDR as revenue without deducting the interchange, which overstates the acquirer profit. For a business analyst, acquiring economics is a modelling and reporting subject. You must specify the pricing model, the cost components, the profit and loss report, the review frequency, and the triggers for a pricing review. You must also specify how the system handles a scheme fee change, an interchange change, and a chargeback rate change, because each one affects the profit and loss. A common gap is failing to specify the merchant profitability report, which is the report the finance team needs to decide whether to keep, reprice or exit a merchant. Takeaway: acquiring is a thin-margin business, and the profit is made or lost on the chargeback rate and the card mix, not on the headline rate. Further reading: the Visa Core Rules for the merchant discount rate; the Mastercard rules; the Financial Conduct Authority guidance on acquiring. Last reviewed 7 November 2026. A pricing model that ignores the chargeback rate will look profitable until the first bad month, and then it will not.