Credit Card Interchange Downgrades Explained

The cost of accepting credit card payments can be significant for businesses of all types and sizes. Several fees contribute to the cost of payment processing, but interchange is the most significant and represents the highest fee percentage per transaction.

What is interchange?

As a refresher, interchange is set by the card brands and paid to banks that issue credit cards. There are hundreds of interchange rates that are determined by the type of card used, industry of the business it is used at, and the type of transaction (in-person, ecommerce, etc.). It’s important to note that interchange is not a static fee, and many factors must be met for businesses to receive the most favorable interchange rate for each transaction.

What is an interchange downgrade?

When these factors aren’t met, the transaction no longer qualifies for the lowest interchange rate. Instead, it is considered a downgrade and a higher interchange fee is assessed. The business is responsible for paying the higher fee, so being aware of downgrades and learning how to prevent them is an important step in controlling costs.

Why do interchange downgrades happen?

There are several factors that contribute to downgrades, many of which can be prevented by diligent businesses. Here are some common reasons for interchange downgrades.

1. Time to settlement exceeds 24 hours.

If the time between payment authorization and settlement exceeds 24 hours, that transaction may be subject to a downgrade.

2. Mismatch between merchant account and transaction type.

Using the example of a retail account, if that business is set up to physically dip or swipe cards at their location and the transaction is keyed-in instead, it may be subject to a downgrade.

3. Incomplete verification data.

For card-not-present transactions, Address Verification System (AVS) uses a customer’s billing address and ZIP code as additional data points to help prevent fraud. If these data elements are not provided, the transaction may be downgraded.

How can a business prevent interchange downgrades?

Here are some pointers for preventing downgrades:

1. Settle batches within 24 hours.

Payment card transactions can be batched out automatically every day to help prevent stale authorizations from becoming problematic downgrades. Check to see if this feature is available via your point of sale (POS) software or card readers.

2. Accept payments according to your account type.

Retail accounts should swipe/dip physical cards, keyed account should used keyed-in card information, and ecommerce accounts should accept card payments through their website.

3. Talk to your payment processor.

Your payment processor can help identify downgraded transactions and the reasons why they were downgraded. From there, your business can establish best practices for keeping interchange downgrades to a minimum. 

Need help controlling the cost of payment processing?

Paystri can help. Get in touch.