# Why is the "discount rate", charged to merchants in card transactions, called that?

When accepting payment via a credit card or debit card, a merchant is charged a "discount rate" (or "discount fee") by the acquiring bank. For example, when a merchant receives a credit card payment of \$100.00, if the bank's discount rate is 3.7%, then the merchant will only actually receive \$96.30, with the remaining \$3.70 being charged by the bank as per the discount rate. (This answer has a nice summary of how this works.)

My question is, why is the "discount rate" called that? In the most typical usage of the term, a discount is a reduced price charged for something. In the context of the "discount rate" on a merchant receiving a card payment, who is receiving a discount?

(In researching this question, I found a number of sites that define the term "discount rate" in the context of card payments (e.g. 1, 2, 3), but none explain why the term is called that.)

• Are you asking why it's called a rate, when rate typically means "X per unit of time", and there's no time component in taking a percentage of a purchase? Commented Aug 19, 2021 at 16:14
• I'm asking more about the "why" behind the usage of the word "discount" in the term (as per the 2nd paragraph in the question). Commented Aug 19, 2021 at 16:31
• Oh, well.. look at definition 1 in the link: "to deduct a certain amount from (a bill, charge, etc.)". The bank did exactly that: deducting 3.7% from an "etc" (specifically, their payment to the merchant). Commented Aug 19, 2021 at 16:35
• @RonJohn at 47k rep you know better. Please do not answer in a comment. We cannot properly curate comments. Commented Aug 20, 2021 at 16:32
• @RonJohn: a rate is a ratio. It is not in any way tied specifically to time. Commented Aug 20, 2021 at 19:53

## 3 Answers

The merchant is accepting a discounted price for their product. When the merchant has something for sale with a price listed as \$100, if they accept a credit card payment with a discount rate of 3.7%, they are accepting a discounted price for their product. The consumer does not receive this discount; the bank does.

When you, as a consumer, buy something with your credit card, you are not actually paying the merchant anything. The bank pays the merchant a discounted price, and then later you pay the full price to the bank.

Discount rate is a financial concept and has nothing to do with the bargain between the customer and the merchant.

When the merchant sells you \$100 of goods on credit, a debt is created - you owe the merchant \$100.

Before credit cards were invented, the merchant would send you a bill at the end of the month and hope that you paid (suing customers is not good for business).

The merchant needs cash, so he sells the debt to the card issuer whom he can trust to pay on time.

The card issuer has to do some work to collect the debt, he knows that not all cardholders will pay on time, some will challenge the charge, etc., so he demands a discount on the debt. This is calculated at the discount rate.

(This is the theory which explains the term. In some jurisdictions, the card issuer is considered to have made the purchase and can be sued if the goods are defective.)

(The same holds for business-to-business credit accounts, where the debt could be sold to a credit factor at a discount.)

• Ben Miller's answer is more concise, but I like your answer, as it is more complete. However, for most people the more concise answer will provide sufficient information to satisfy their curiosity. However, I think you could improve your presentation by opening with This is the theory which explains . . ., and relegate In some jurisdictions, . . . to footnote status. It might require a little rewriting of the 1st couple of paragraphs. Commented Aug 20, 2021 at 19:59
• BTW, grahamj42, I suggested those edits because that would put your thesis in the opening paragraph. This is almost always a good idea, so that your readers know where you are going - and can then easily follow along as you explain things. Commented Aug 21, 2021 at 14:53

When a fee is expressed as a percentage, it can be a percentage of the total amount, or it can be a percentage of the original amount. "3.7%" under the former meaning means that there are \$3.70 of fees for every \$100 (that is, for every \$100, there's \$3.70 of fees and \$96.70 going towards the original transaction), while under the latter meaning it means that out of every \$103.70, \$3.70 will be fees and \$100 will go towards the original transaction. The word "discount" is being used to indicate that it is the former meaning. The reason it's called a "discount" is because, from the merchant's perspective, it's the same as if you had paid them 3.70% less. Whether their lost \$3.70 goes to you or the issuing bank keeps it for themselves, it's pretty much the same to the merchant (if you're getting cash back from your credit card, that's your bank letting you keep some of this discount).

You will also see this distinction with bonds. If a bond just says "interest rate of 3.7%", that means that if you buy the bond for \$100, you will get \$103.70 back. If it's listed as having a 3.70% discount rate, that means that you'll have to pay \$96.30 to get a bond that will pay out \$100.