What if I told you there is a way to save up to 30% on your merchant service fees?

Would that interest you enough to keep reading? As a service that most merchants cannot run a business without, we are always striving to show our merchants various ways to help keep the costs associated with accepting credit cards down, while still providing their customers with all of the payment options they need.

No, we’re not talking about shopping for a better rate and going through the trouble of switching processors. The constant ‘grass is greener on the other side” shopping for a lower rate is a never-ending rabbit hole. No, I’m referring to lowering your current fees through a little due diligence.

For many merchants, who may have pretty good rates already, it is not uncommon for them to end up paying up to 30% more in processing fees than they expected to pay based on their rates due to a little banking process called “downgrading”. In this article, we’re going to explain what a downgrade is and how to avoid common downgrades to help our merchants save up to 30% on merchant service fees.

What does it mean to have a credit card downgraded to a higher rate?

Each of the card brands, meaning Visa, MasterCard, and Amex, have a set of qualification requirements for each of their card type categories where each category corresponds to an interchange rate. This is the rate that they charge a business to process a credit card transaction.

When transactions meet certain requirements they process through the category they were meant to, but when they do not meet all the defined requirements they are “downgraded” to a higher rate category. It’s like they are saying “since we’re not sure about this we’re going to charge a little more..”.

Downgrades can be applied to all types of card transactions. It doesn’t matter if it is a credit card, a debit or ATM card or a prepaid card transaction. It doesn’t matter if the card is present or the transaction is for a card-not-present sale, although it does happen more often for transactions where it is not possible to dip the chip or swipe the actual card (like for online purchases).  The bottom line is if the transaction is missing any piece of compliance data to qualify for its rate, it will be downgraded to a higher rate category.

EMV chip cards and cards that are actually swiped most often meet all the requirements needed to qualify for the proposed rate. The bigger problem lies with cards that are manually entered. These are referred to as card-not-present transactions, such as online, over the phone and mail order. But it can even happen if the chip or stripe is unreadable by the terminal and must be hand keyed in to complete the sale.

What are the common reasons a card can get downgraded?

One of the most common avoidable reasons for a downgrade is time. Many card requirements include a provision for the transaction to be settled within 24 hrs of initiation. Merchants do that by running a settlement or batch which results in all of the transactions for the day to be sent in for processing. When a business does not settle within 24 hours the transactions will be downgraded to the next or another category of the card brands choice where they will be subject to higher interchange fees. This can result in a business paying somewhere between 0.25% – 0.50% more than they should have.

For this reason, it is always important for a business to run a settlement batch every day at the end of business in order to always meet the timeliness requirement and avoid costing themselves more money. Most terminals can be programmed to automatically batch out at night if you are not the type of business that batches before closing. Restaurants, for example, are a merchant type that tends to batch out every night at closing after adjusting for waiter tips. But a retail store may have employees that just close at night and don’t worry about the sales for the day. Besides, you can’t get paid until you batch out your settlement!!

Another common reason for a downgrade is NOT properly utilizing fraud deterrent transaction software. A fraud deterrent tool called Address Verification System (AVS) is instilled to help to detect fraudulent transactions. This requires one to enter the numerical part of the billing address and zip code that is associated with the card whenever a transaction is run by manually entering the credit card information. This helps to reduce fraudulent transactions which cost everybody money. Failure to do so will cause the transaction to be downgraded to the higher rate category. Always perform address verification for any manually keyed in transaction and card-not-present online (eCommerce) purchase.

There are also certain rules that card brands like Visa require for e-commerce sales specifically. Your service provider can ensure that each transaction includes both the order number and the customer service phone number as well as being flagged with the E-Commerce Indicator flag (ECI). This will help to ensure that E-Commerce transactions meet the qualifications for the lower rate category.

Recognize your credit card downgrades and save up to 30% on your processing.

So, now you know that these downgrades are happening and that they represent a very real cost to your business. How can you recognize these types of transactions on your statement and make efforts to minimize them?

Well, this depends greatly on the type of pricing model your merchant service provider has set you up with. I’m not going to mince words here. The only type of pricing you should be on is Interchange Plus. It is the only truly transparent pricing model. If you are being charged under what is called tiered or bundled pricing my first recommendation is get a new processor.

Let’s dive into this just a bit.

When a processor prices under interchange plus, they pass the cost of Interchange (set by the card brand) on to the business with a very clear markup, which is their fee. When a card downgrades the increased Interchange cost will also be passed on to your business but there is no additional fee by the processor.

However, under a bundled pricing model the processor is able to choose what they are charging (over and above the passed through Interchange fees) for each category, higher rates for anything other than the qualified tier. But, they are also able to decide which card types will fall into a specific category. You have no idea, as a merchant, how many rewards or corporate cards you will be getting compared to regular credit cards. You could end up with the majority of your transactions falling into the unqualified category where the processor charges a higher rate over and above the higher interchange rate.

This exact process is how a processor who quotes your rates on a tiered or bundled type of merchant account is able to quote a very low rate for processing but then have the actual processing come in much higher than they quoted. Their super awesome low percentage rate is based on “qualified” cards and yours just aren’t qualified (thanks to them).  This is an underhanded way for these salesmen to make more money off the merchant.

It’s important to point out that when you are on Interchange-plus the processor will not get any monetary benefit off of a business’s downgraded transactions. But, as you can see this is not necessarily the case with bundled pricing. Not only is tiered pricing difficult to see what you are really being charged but it is also difficult to recognize a downgrade in the first place.

With Interchange -Plus pricing recognizing a downgrade is easy.

You will be able to recognize a downgrade by the description on your statement. There will be a code next to the transaction indicating the reason for the downgrade. It will either fall under EIRF (electronic interchange reimbursement fee ) or Standard. You will not only be able to see how many cards ended up in each category but also the dollar amount processed.

If your account is on tiered, or bundled, pricing I recommend immediately finding a new processor. It would be almost impossible to find out which cards were downgraded and why. Also, keep in mind the processor is making more money off of the account when cards are downgraded into one of their higher-rated categories, so they really have no incentive to point them out to their merchant.

Your processor should be able to provide you with a downgrade report which will in-turn provide you with the “reasons” for the downgrade and enable you to take steps to correct the issues.

Take-aways : Downgrades result in a very real cost. Downgrades are very much an avoidable expense.

Making sure that you know how to watch out for downgrades and taking the time and effort it takes to correct them in your everyday business will enable you to be sure that you pay as little as humanly possible to accept and process credit cards in your business. It is a goal you can and should strive for and we can help you. Our main goal as a Merchant Service Provider (MSP) is to provide our clients with the highest value for the most affordable price. We always strive to ensure your business pays as little as possible to process credit cards and have the services you need to successfully run your business.

Of course, we would love it if you would give us a chance to prove ourselves your best and most affordable resource for merchant services. But even if you don’t, we are always happy to educate merchants on ways to get the most out of their merchant services.