Downgrading Credit Card

TABLE OF CONTENTS

    credit card

    If you are one of the ten million-plus American businesses with a merchant processing credit card account, the chances are you are aware of an industry term known as interchange.

    As with many aspects of banking and merchant processing among credit card issuers, the term represents something slightly confusing (at best) and incredibly bewildering (at worse), with lots of banking jargon and terminology thrown into the language to confuse you a little further. One of those terms is merchant interchange.

    In its most basic terms, merchant interchange isn’t confusing at all. The term refers to merchant transaction costs and relates to a regular part of banking. There are complex aspects of the interchange downgrades, but the core principle of it is pretty simple.

    Essentially, whenever a credit card is swiped through the processor, the transaction is immediately categorized into one of three buckets, depending on the card used, the merchant status, and how the card was facilitated. That’s the most important thing you need to know.

    What Is a Bucket?

    It’s an industry term. Also known as interchange categories, these buckets establish interchange rates with every processed transaction between the credit card issuers and the merchant processors. The interchange category, or bucket, is the key point at play here and the reason for a fair amount of distress among business owners.

    Each new credit card transaction is assigned to what is known as a target interchange category. In layman’s terms, if the credit card transaction is facilitated smoothly and without issue, the merchant will pay the interchange fees relevant to the correct target category.

    But this is where problems sometimes arise: occasionally, credit card transactions can bounce between the three different categories or buckets when certain tier requirements need to be correctly addressed or when relevant additional information is provided.

    Interchange Downgrade

    In fundamental terms, the bucket system identifies something imperfect about the credit card transaction and assigns it to different buckets to find the relevant categorization. Each time it does so, that is known as an interchange downgrade.

    Fees are associated with each categorization, and for many business owners, these fees can genuinely put a dent in margins – we are talking hundreds, thousands, sometimes even tens of thousands of dollars per month, depending on the size of the business and the number of daily transactions, of course.

    Downgrades are a challenging thing to comprehend in their entire terms. If you are part of the majority who don’t fully understand downgrades, you are losing money unnecessarily.

    That’s something we hate to see and hope to change, starting with this article. We aim to break down the minefield of downgrades into its simplest terms so you can grasp this potential issue. Forewarned is forearmed, as they say.

    Solution

    So, if you are a business owner processing multiple credit card transactions each month, you will likely be aware of the whole interchange/downgrade issue. For most people, this is something of a mild irritant, no more than a few dollars each month being drained away by credit card issuers through these confusing charges.

    Alternatively, this might be a more serious issue, with multiple charges amounting to lots of money draining away to credit card companies and banks each month, courtesy of the credit card issuer. Either way, this is something you need to address.

    Most business owners view credit card downgrades as a regular part of your banking statement, but you shouldn’t allow them to grow out of control. Merchant account downgrades could amount to thousands of dollars worth of fees each year, most of which are avoidable and unnecessary.

    The good news is that you can take proactive and reactive measures to fight back and reduce these charges, which will ultimately help your business by protecting your margins each time a credit card company – or processor – facilitates a transaction.

    After all, that is probably why you got into business in the first place. You are here to make a profit; it will be pointless if credit card charges are constantly sucking away your hard-earned profits.

    What Causes Downgrades?

    terminal and card

    If the interchange downgrading system is still unclear, the following scenario may clarify. Imagine a customer purchases a bus ticket from a transport company’s website using a Visa Infinite credit card. Let’s further imagine that the interchange fixed rate, when all the relevant eligibility is met, is 2.50% of the transaction amount plus $0.15.

    Therefore, if the customer pays for a $100 round-trip ticket using a credit card, the cost of interchange is $2.65. In the common event that only a few of the eligibility standards are met, the interchange will downgrade to 3% of the ticket price plus $0.15. The result would be an interchange cost of $3.15, which is a significant increase.

    It’s not difficult to grasp that if this hypothetical transport company regularly fails to meet the standard eligibility requirement of credit card transactions, the total monthly cost for being as a result of being downgraded by the interchange, can soon mount up quite significantly.

    Software and Equipment

    Many interchange downgrades are owing further to the credit card processing equipment or credit card software being used. Most interchange downgrades are because of the business’s processing behavior – meaning how it authorizes and settles transactions through downgrading credit cards.

    The bad news is that businesses are often the cause of their credit card downgrade issues. The good news is that this provides an opportunity to adjust processing behavior to eliminate, or at least significantly reduce, the occurrence of a credit card downgrade. Before we get to that, let’s look at who is most susceptible to the issue.

    Business Categories Most Prone to Downgrades

    Credit card downgrade interchange qualifying guides are available for Visa, MasterCard, and Discover. The specifications that a transaction must meet for various interchange categories are outlined in these guidelines. Transactions that don’t satisfy these conditions will be downgraded to a higher-rate interchange category.

    Businesses that do not swipe cards, such as mail-order or e-commerce companies, are more vulnerable to credit card downgrades than retail businesses that swipe cards (or dip cards, in the case of EMV) through a credit card reader.

    This is because once a transaction is swiped, the business’s processing machinery reads and transmits all necessary data along with the transaction. “Electronic data capture” is the industry term for this procedure.

    This isn’t the case with credit card-not-present purchases like keyed or e-commerce. In this situation, one must supply all the necessary information. This is less dependable than having the task carried out automatically by a piece of machinery.

    What Are Some Typical Reasons for Downgrades?

    Card-present businesses (swiped transactions)

    • Stale authorizations

    It is considered stale if the permitted time has exceeded between authorization and settlement.

    For a business to get paid from a transaction, authorizations need to be fulfilled. The exchange category qualifications determine the period between authorization and payment. The credit card transaction will be downgraded if too much time has passed after it was completed.

    To prevent credit card payment downgrades brought on by stale authorizations, make sure your batch of authorizations is being settled at least once every day. This is because many exchange categories demand that authorization be settled within 24 hours.

    Most credit card POS software and credit card readers may automatically close batches (settle authorizations) at a particular time each day. This functionality is highly useful for preventing downgrades brought on by expired authorizations.

    Credit Card Not Present Businesses (online, called-in, keyed)

    • AVS Fail

    Address Verification System, or AVS for short, is a fraud prevention mechanism that informs businesses whether the address that a cardholder provides matches the address currently on file at the cardholder’s issuing bank.

    Card-not-present transactions must have address information (the customer’s five-digit zip code) to be eligible for interchange target categories. The transaction will be downgraded without a customer’s zip code. Ensure you provide a customer’s billing zip code with every transaction to prevent AVS-related downgrades.

    • Failure to Supply the Correct Customer Code

    This justification only applies to credit cards given to businesses or other commercial entities, not to private individuals. One particular interchange requirement for commercial cards is that a customer code is supplied along with the transaction. Any numerical value can be a customer code.

    Businesses should provide a customer code when processing all transactions with a commercial credit card to prevent these downgrades. If you don’t have or aren’t aware of the customer code, you can fulfill the interchange requirement by providing any number value.

    How a Downgrade Increases Your Bottom Line

    credit card and terminal

    A transaction is handled more quickly when it is downgraded, which increases the cost to the business. The pricing model that a processor uses to determine charges to a firm is the most crucial of these factors, and it will determine just how much more expensive the cost will be.

    The two common price structures are bundled and interchange-plus, as discussed in our credit card processing guide.

    How Can You Identify Interchange Downgrades?

    It can be challenging to detect downgrades on a credit card processing statement with bundled pricing. Downgrades will indeed cause a significant number of transactions to be charged at the non-qualified rate; however, certain processors impose an additional fee for numerous non-downgrade categories. To put it mildly, aggressive pricing is not always a sign of severe downgrades.

    Switching to a processor that doesn’t employ bundled pricing, including those that provide certified estimates, is the best course of action.

    It is significantly simpler to spot downgrades on an interchange-plus credit card processing statement.

    There are two forms of interchange that are frequently connected to downgrades. The terms “standard” and “EIRF,” which stand for electronic interchange reimbursement fee and “standard,” respectively, are used to describe these categories.

    Examine the credit card processing statement you received. If you find “EIRF” or “standard” linked to a lot of transactions or volume, you have too many downgrades. EIRF and normal downgrades are both highlighted in the image below.

    Can You Resolve Downgrade Issues?

    On every processing statement, a few downgrade interchange categories are usually apparent. Although it’s practically hard to totally stop downgrades, they shouldn’t make up a significant portion of your sales volume or transactions.

    Finding out why downgrades are occurring is the first step in fixing them. The simplest method to do this is to ask your processor for a downgrade report. This report identifies transactions that failed to reach the intended interchange level and gives the reasons why they failed.

    A representative from your processing company should be able to offer suggestions on how processing behavior might be changed to stop downgrades after the causes have been identified.

    Consumer Downgrades

    The terms ‘interchange downgrades” and “credit card downgrades’ are two different subjects. The former is a commercial issue for merchants, while the latter is a consumer issue. Both involve credit card companies on two sides of the fence.

    We know that many people have accidentally arrived thinking this article is about how to downgrade your credit card. Instead of having you hunt around looking for an article on this subject, we thought it would be handy to cover it briefly. So let’s take a look at that.

    How to Downgrade Your Credit Card – Consumers

    If you feel the annual fee is no longer worthwhile, think about reducing it instead of canceling it. You can downgrade your credit card by switching to a different credit card from the same issuer that has a reduced cost or none at all, typically in exchange for fewer points and benefits.

    Credit card issuers are keen to retain your business and will sometimes allow the option of downgrading your credit card instead of seeing you leave for other credit card issuers. In turn, your credit history will not be affected.

    What Is Downgrading a Credit Card

    If you have been loyal to a credit card issuer for some time, but you are unable to justify the high annual fees – It might be that the annual fee is not being justified anymore through bonus rewards that you are no longer using. You could just cancel the credit card, but that might affect your credit score or credit history.

    The best solution for leaving your credit score intact whilst avoiding the hassle of applying for new cards with other providers is to downgrade your credit card to a card with lower annual fees in return for fewer bonus rewards. This way, you can reduce the annual fees without affecting your credit history.

    How to Downgrade Credit Card?

    You first have to call the credit card issuer and enquire about downgrading your credit card. They will route you through to a specific department that will discuss with you the downgrade options.

    It really isn’t any more complicated than that. You simply review those same downgrade options and make a decision on which package is good for you.

    There are no guarantees you will be able to downgrade – depending on the terms and conditions with your card issuer – but to increase your chances, you might want to pay attention to the following:

    1. Be aware of how long you have had the credit card account. Sometimes your card issuer issuers will refuse a downgrade if the account has been open for less than 12 months.
    2. Cash-in credit card rewards. You will likely lose any unclaimed rewards, so make sure to use them.
    3. Call your credit card company. Contact your card issuer to formally make the request. The process of getting your credit card downgraded varies among card issuers. Some require you to call, while others only allow you to do so online.

    Wrap Up

    Credit cards are a useful tool in modern-day life, but they can quickly become a financial hindrance if personal circumstances change.

    The good news is that downgrading your credit card is an option with many (but not all) credit card issuers, and, as discussed, the process is fairly simple.

    Chad is a serial entrepreneur and founded Payment Savvy in 2011 armed with the goal of providing high-risk establishments with a pioneering and tailored payment processing solution that allows them to flourish. Having decades of knowledge in the financial services and debt recovery industries, he ensures every client receives the same level of expertise, resourcefulness, and strategic vision no matter the size of the organization. Always willing to push the envelope, Chad’s forward-thinking and leadership skills are responsible for Payment Savvy being on the map as an industry-leading payment processor.