Mercy is a transaction when it is offered only on the condition of obedience to requirements. It is doubly so if, in return, the one receiving mercy accepts a subsequent duty or obligation to the grantor of that mercy.
Mercy derives from a law and an enforcement authority. Mercy is extended at the whim of that authority in relation to that law. The authority can extend mercy or not; he can favor one and not another. Mercy emphasizes the letter of the law and what is rightfully due to a malefactor. When mercy is granted, the excused individual is expected to feel gratitude and a subsequent responsibility toward the grantor of that mercy. Mercy accentuates the guilt of the offender and the exalted status of the ruling authority. Mercy entails a continual remembrance of prior mistakes and poor performance because mercy has no place aside from the memory of past wrongs and the laws defining those wrongs.
In this fashion, the picture of God as the God of mercy or unmerited favor has been told and retold countless times. Each of us is said to deserve the most horrendous fate imaginable, but God has condescended to offer mercy as a way of escape. Believe this and do that, and you can be the recipient of divine mercy. Mercy is not simply given; it must be obtained by meeting the demands of the mercy giver.
In accepting that offered mercy, the supplicants are called upon to see themselves as perpetually undeserving and inadequate. Their relationship with the merciful authority is thus limited by this implied sense of being unworthy and even contemptible.
Grace, on the other hand, is not a transaction. There is no swapping of compliance for grace. It is not extended or offered conditionally because it flows naturally as a defining characteristic of the Divine. God is love, and God is therefore gracious. God is not conditionally defined by love; He is love in all cases and at all times. That same God is gracious unconditionally, which means that ideas like undeserving and unworthy never attach to grace.
Grace, like love, is blind. It sees no fault because it understands and accepts human frailty and malfeasance. Grace says all are worthy by definition, and none must prove themselves before grace becomes a reality. Love is always gracious, and a gracious, loving God is light-years removed from the concept of unmerited favor.