Most Common Interchange Downgrades

If your business accepts credit cards, you probably have a basic understanding of interchange fees and rates. 

Interchange rates are set by the credit card companies. The fees are based on the category of each transaction, which is determined by factors like the merchant, card type, processing method, and other elements. 

However, sometimes the transaction doesn’t include enough information, fails to meet certain requirements, or something else goes wrong. In these scenarios, the transaction moves or “downgrades” to another category.

As a result, merchants pay more for a transaction that’s been downgraded. 

I created this guide to highlight some of the most common interchange downgrades. You’ll also learn more about what downgrades are, what causes them, and how to avoid them. 

What Are Interchange Downgrades?

Every credit card transaction has a target interchange category. Your target interchange category has the lowest interchange fees, assuming everything goes according to plan.

This will be the best-case scenario for your business.

When specific requirements aren’t met, not enough information is provided, or something else happens, a transaction can move from one category to another. 

An interchange downgrade happens when this re-categorization occurs. As a result, you’ll incur extra interchange fees for the new category. 

Interchange downgrades are somewhat of a complex subject. But if you don’t take the time to learn how they work, you could be throwing thousands of dollars away each year. 

Visa Interchange Downgrades

Visa’s downgrade program is known as the “non-qualified interchange.” The non-qualified consumer credit interchange rate is 3.15% + $0.10 per transaction, which is significantly higher than other Visa interchange rates.

Any transaction that does not meet the CPS criteria is subject to the new non-qualified interchange fees.

They apply to both card present and card not present transactions as well.

Mastercard Interchange Downgrades

Like Visa, Mastercard has its own rules interchange downgrade credit card processing fees and rates.

The following consumer card types will all be subject to the same Standard downgrade rate of 3.15% + $0.10 per downgraded transaction:

• Mastercard Standard Core
• Mastercard Standard Enhanced
• Mastercard Standard World
• Mastercard Standard World High Value
• Mastercard Standard World Elite

Here’s a look at those interchange downgrades rates for consumer credit cards directly from Mastercard’s interchange programs and rates resource. 

What Causes Visa Interchange Downgrades?

There are certain scenarios that will automatically trigger an interchange downgrade. Before you can avoid an interchange downgrade, you need to understand what’s causing them in the first place.

Here are some of the most common reasons for interchange downgrades.

Delayed Authorization 

This is also known as a “stale” authorization. It occurs when too much time passes between the initial authorization and the credit card settlement. 

All credit card transactions must be settled for your business to receive funds from the transaction. Here’s a visual representation of how the settlement process works. 

If you wait too long to settle your transactions, the authorization will go stale. When this happens, a transaction can downgrade. 

How much time you’re allowed before an authorization goes stale varies depending on the interchange qualification.

But here’s a general rule of thumb. The majority of interchange categories require a settlement within 24 hours of a transaction occurring. 

Mismatched Authorization

The sale amount must always match the authorization amount. Here’s an example to show you what I mean.

Let’s say a customer buys $100 worth of merchandise at your brick and mortar retail store. You obtain the authorization that’s required to approve the transaction. But then the customer decides they don’t want to buy one of the items. This change brings the sale total down to $75.

You must cancel the transaction and redo it. Otherwise, you can face a downgrade. 

Poor Security

Payment processors and card networks take security measures very seriously. They require merchants to abide by certain security protocols to protect cardholders. 

Your application of these security measures will impact your interchange category. 

For example, let’s say you have an eCommerce store and forget to use an AVS (address verification system) to verify that the customer’s billing address matches the card used in the transaction. An interchange downgrade could occur as a result.

How to Avoid Interchange Downgrades

Interchange downgrades can be expensive. Some interchange downgrades are nearly 1% higher than the target interchange category. 

How much money in credit card transactions does your organization process in a year? 

Let’s say you process $15 million. If all of those transactions were downgraded, you’d pay roughly $150,000 in additional credit card processing fees each year.

Those could easily be avoided. Here are the best tips and best practices for avoiding interchange downgrades:

Settle Batches Every Day

Always settle your credit card batches daily. As previously discussed, delayed authorizations or “stale” authorizations are a leading cause of interchange downgrades.

You can set up most POS systems to do this automatically at a specific time each day. 

If you have a large organization that’s processing transactions at scale, this type of feature will be extremely helpful for avoiding an interchange downgrade. 

Don’t Force a Transaction

We already talked about the importance of credit card security in the payment processing industry. But merchants have the ability to bypass certain security protocols in order to force transactions to the credit card processor. 

In some cases, merchants do this to save time when processing a transaction. We strongly advise against this. 

Forcing a transaction will automatically lead to a downgrade. Don’t cut corners to save time. It can ultimately make your transactions more expensive. 

Make Sure You’re Using Updated Equipment

Using old and outdated hardware and software could lead to an interchange downgrade. Aside from the security protocols, some equipment could fail to collect certain pieces of crucial data. 

Make a habit of assessing the condition of your equipment on a regular basis. Take steps to ensure that it’s been set up correctly, and it’s secure as well. 

Review Your Downgrade Reports

Request a downgrade report from your credit card processor. This will help you identify how many downgrades you’re getting. The report will also explain which interchange requirements weren’t met.

Ultimately, a review of your interchange downgrade reports can give you insight into what’s causing downgrades in the first place. Then you can take the proper steps to prevent them moving forward. 

Final Thoughts on Interchange Downgrades

Interchange downgrades are something that every CFO, controller, and business owner need to understand. Yet they are rarely talked about.

Downgrades can be a complex subject. Especially with the credit card brands and merchant account providers adjusting their fee schedules and making changes. 

But these fractions of a percentage are significant. Interchange downgrades can be costly for merchants that process credit cards.

To learn more about how much money your business can save on credit card processing, contact our team here at Merchant Cost Consulting. We’ll review a recent credit card processing statement and give you a free audit. Our team has extensive experience working with merchant accounts in different categories and industries.