Interchange and MDR revenue recognition

Interchange and MDR involve multiple parties (issuer, acquirer, scheme, merchant) and often require netting scheme costs against fee income to determine whether the entity's revenue is the gross MDR or a net spread, which depends on the entity's role in each leg of the transaction; misclassifying pass-through amounts as own revenue inflates both revenue and cost of sales without changing net profit, but distorts margin ratios and take-rate disclosures investors rely on.

Is the entity the acquirer charging the merchant directly, or an intermediary reselling acquiring services from another acquirer? Are interchange and scheme fees genuinely pass-through amounts the entity collects and remits without discretion, or does it bear them as principal? Is the value-chain mapping applied consistently and updated whenever scheme pricing changes?

1) Map the full value chain for each fee type (interchange, scheme fee, MDR) and identify which party is contractually and economically responsible for each leg. 2) For amounts the entity merely collects and remits to the scheme/issuing bank without discretion, assess agent treatment (net). 3) For the entity's own economic margin (e.g., the acquirer spread above interchange and scheme fees), assess principal treatment (gross for that component only). 4) Recognize MDR revenue at the point in time the transaction is authorized and processed. 5) Build a clear value-chain map per product/scheme that is applied consistently, and update it whenever scheme pricing structures change. 6) Do not conflate the gross/net conclusion for MDR with the separate principal/agent conclusion for the overall payment flow (FINT-001).

Separate the transaction price into the entity's own fee versus amounts collected on behalf of other parties in the value chain; consistent application requires a clear value-chain mapping for each product; where the entity negotiates its own interchange-plus pricing with merchants, measure its own margin as the difference between the all-in MDR charged and the pass-through interchange/scheme costs.

Disclose: revenue disaggregated by fee type (acquiring, issuing, value-added services); the basis for gross versus net presentation of scheme-related costs; the accounting policy applied to interchange-plus versus blended pricing models; and any change in presentation basis with its rationale and effect.

• Recognizing gross MDR as revenue while also expensing interchange and scheme fees as cost of sales when a net presentation is more appropriate
• inconsistent treatment of the same fee type across merchant segments
• failing to update the value-chain map when scheme fee structures or merchant pricing plans change
• treating scheme volume incentives received (a cost offset, see FINT-029) as part of MDR revenue.