What Are “Downgrades” & How Much Are They Costing You?

As a business owner – whether of a retail establishment or an online store – you know that credit card processing fees eat into a big slice of your profits. Just glancing at your merchant account statement each month could send you into a dizzying spin of frustration – especially when you see those outrageous Mastercard and Visa downgrade fees costing you hundreds of dollars of your hard-earned money every 30 days. But hey, that’s life right?

Not really. Merchant account downgrades shouldn’t make you need therapy.

Still, while credit card downgrades may be an inevitable part of your statement, they don’t have to play the dominating role you’ve grown accustomed to. Merchant account downgrades could be robbing you of thousands of dollars worth of avoidable fees each and every year. Fortunately, there are some things you can do to get around many of them, which will ultimately put more cold, hard cash in your pocket. You like cash, right?

What Are Merchant Account Downgrades?

You already know that every single time you process a customer’s credit card, you are going to pay a fee. If you’ve read our article about interchange reimbursement, you also know that credit card transactions are divided into different categories. It doesn’t matter if you’re on an interchange-plus, or a tiered (aka bundled) pricing plan, every one of your transactions will fall under a specific category (e.g. CPS/Retail, CPS/e-Commerce basic, etc…).

In this article we’re going to focus on downgrades in relation to the tiered-pricing model, because as you will see, downgrades under that model can get particularly expensive.

With tiered pricing, processors bundle the above mentioned interchange categories even further into – qualified, mid-qualified and non-qualified tiers. The category each transaction falls into determines the rate you will pay the processor for that purchase. Qualified tier rates are much lower than mid qualified and non-qualified rates. In the words of Captain Obvious, “You DO NOT want to pay mid or non-qualified rates.”

For example, let’s say your credit card processor charges the following rates:

Qualified – 1.59%
Mid-Qualified – 2.49%
Non-Qualified – 2.89%

Although the qualified rate may seem reasonable, and perhaps even competitive, it is of little worth if it only applies to a small percentage of your transactions. To put it in perspective $25,000 in monthly credit card transactions would cost just under $400 at the qualified rate, whereas the same sales fees could skyrocket to well over $1,000 at the mid and non qualified rates. That’s because every transaction is first subject to the qualified rate and then to the mid- qualified or non-qualified rates that act as additional surcharges. In the example above, you would pay a minimum of 1.59% plus either 2.49% or 2.89% per transaction if a downgrade applies. It can really add up.

How Much Are Downgrades Costing You?

The first step to lowering your downgrade expenses is by determining exactly how many of your credit card transactions are being downgraded each month. If you’ve calculate your effective rate and notice that it’s too high, then chances are, you’re dealing with some downgrades. Unfortunately, many merchants dig into their statements only to find that the vast majority of their transactions are being downgraded – as many as 90 percent of transactions for some business owners!

Few business owners are capable of predicting which transactions will be downgraded and which ones will not. Most erroneously assume that the majority of their transactions will be qualified, leading them to shop for the lowest qualified rates when picking a credit card processor, rather than comparing the mid-qualified and non-qualified rates as well. Because the processor determines the guidelines by which transactions are categorized, many merchants end up paying a lot more in fees than first expected.

Here’s a sample statement where we’ve highlighted the different tiers and their rates. You’ll notice that a large amount of this merchant’s Mastercard transactions fall under the non-qualified tier.

(Click to Enlarge)

Some statements aren’t as easy to read as the example above, so if you’re having trouble determining if your transactions are being downgraded, let us know and we’ll help you out.

What You Can Do About It

Unless you enjoy helping your credit card processor get a little richer every day at your expense, we suggest taking matters into your own hands. The first thing you should do is switch from tiered-pricing to interchange-plus. Doing so will immediately get rid of the qualified, mid-qualified, and non-qualified rates that tiered-pricing is notorious for.

Additionally, there are some key factors in determining whether your transactions get downgraded. Each card you process must meet the requirements of your credit card processing agreement and any amendments made to it by your processor.

The following guidelines must be met:

• Use of a standard credit card
• The card must be swiped (for transactions in person)
• Transactions must be batched within one day
• Verification information must be entered correctly, including billing address and AVS (for online purchases)

If any one of those requirements is not met, a transaction may be downgraded. Examples of other actions that could result in a downgrade include:

• Manually entering credit number/expiration information in person
• Use of a non-standard credit card, such as a cash-back card or business card
• Missing information for manual or online transactions

Considerations

It is important to keep in mind that not all credit card transactions will avoid being downgraded. However, if you’re just now finding out that you’ve been paying an extra one to two percent of your profits to your processor just because you haven’t taken the time to batch out your credit card transactions at the end of each day, you may be reeling with aggravation right now. No, you can’t do anything about the mistakes you may have already made, but you can take careful steps to avoid shelling out more money than you have to each month. Better yet, you can use a credit card processor that won’t take advantage of you with outrageous fees and unpredictable tiered billing techniques. Just a thought.