Why Interchange Downgrades Occur and How You Can Avoid Them

Since your business accepts credit cards, you’re likely familiar with interchange fees. An interchange fee is one of the main costs associated with processing credit card transactions. Depending on factors such as card type and merchant type, all transactions are put into a category that determines which interchange fee will apply to them.


Sometimes, however, a transaction will change, prompting an interchange downgrade. Here’s what interchange downgrades are and how you can avoid them.


How Interchange Downgrades Work


Each credit card transaction has its target interchange category. This category has the lowest interchange fees, which means that a transaction going through smoothly is the best-case scenario for your business.


The issue is that transactions can move from this category to another one. This usually happens due to not meeting specific requirements or not providing enough information. Either way, this re-categorization will trigger an interchange downgrade, increasing your interchange fees. Over a year, interchange downgrades can cause your business to lose thousands of dollars.


Why Interchange Downgrades Happen


To avoid interchange downgrades, you need to figure out why they would happen in the first place. Here are some common causes of interchange downgrades.


• Delayed Authorization: This occurs when the credit card settlement process takes too long. The longer this process takes, the more likely the authorization is to go stale, forcing an interchange downgrade. The exact time it takes for the authorization to go stale varies, but most interchange categories need to be settled within 24 hours.


• Poor Security: Payment processors take security seriously, requiring merchants to protect cardholders by following various security protocols. Your interchange category in large part depends on how you apply these security measures. For instance, forgetting to use an AVS to verify a customer’s billing address can be enough to force an interchange downgrade.


• Authorization Mismatch: Let’s say that a customer buys $200 worth of products in your store. You obtain the authorization to approve this transaction, but the customer decides to put one of the items back, bringing the sale total to $150. If you don’t redo the entire transaction, you may face a downgrade.


Preventing Interchange Downgrades


Some interchange downgrades are unavoidable, but plenty can be prevented. Here are some tips that will help you in this regard.


• Settle your batches daily. This is the easiest way to prevent delayed authorizations. Most POS systems allow you to do this automatically at a set time each day.


• Use updated equipment. On top of security concerns, using outdated hardware increases the likelihood of collecting certain pieces of key data. Inspect your equipment regularly and make sure it’s secure and set up correctly.


• Don’t force transactions. Many merchants have the option to force transactions to their processors via bypassing certain security protocols. Don’t go down this route, as it’s very likely to end up in an interchange downgrade.


• Review downgrade reports. Ask your processor for reports of your interchange downgrades. This will make it much easier to figure out which interchange requirements you aren’t meeting.

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