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Accepting credit cards comes at a price, but it doesn't have to break the bank. When a business decides to accept credit cards as a form of payment, their choice of acceptance method can greatly impact the applicable Interchange rates or the amount due to the card issuing banks for settling payment card transactions. Interchange rates are also based on other features such as card type and payment environment (ecommerce, in-person) which can potentially reduce acceptance costs depending on the cardholder benefits associated with the card type.

A credit card processing downgrade occurs when a transaction is routed to an interchange category that is priced higher than the intended category. When this occurs, the rate applicable to the cost of a transaction is increased and the transaction is considered “downgraded.”

However, the interchange rate can also increase if merchants do not follow simple recommended steps to potentially avoid a transaction downgrade. On average, downgrades can cost a merchant 0.5% or higher in fees.

Below are the main offenders causing downgrades and how to solve for them

  • Address Verification Service (AVS): If customers skip providing their zip code when prompted at check out, the transaction will be downgraded which is the most common reason for a credit card transaction downgrade.
  • Delayed settlement: Not only is it best practice to settle transaction batches daily but it's cost effective. On balance, a merchant business will pay higher interchange fees if the transaction is settled more than 24 hours after the transaction authorization
  • Forced transactions: Receipt of a transaction authorization from the card issuer through means other than systemically through the merchant’s point-of-sale system often causes transaction downgrades. Obtaining a voice authorization and manually entering the referenced transaction authorization number in the payment device will also downgrade the transaction.

In summary, downgrades can be expensive, but they are often avoidable by implementing simple best practices. 

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