Avoiding Downgrades on Credit Card Transactions

Merchant Warehouse |

November 18, 2010

A downgrade simply means that you are being charged a monthly merchant rate increase because the type of credit card your customer is using has a higher processing cost, or because a transaction was processed incorrectly.

If you are a merchant who is currently processing credit card transactions, you should consider how to save money every month by avoiding downgrades at all times. In this article, we’ll teach you how to do just that. You cannot always prevent downgrades from occurring, but we can certainly help you keep your transaction costs as low as possible.

There are many different rates that a merchant can be charged per transaction. For a retail or “swiped” account in which a customer physically hands over their credit card for processing, a transaction will receive the lowest “qualified discount rate,” only if the card is swiped, the cardholder is physically present and the credit card is among those issued by major companies, such as Visa or MasterCard.

If any of these criteria are not met, the account will downgrade to either a mid- or non-qualified level. These levels are each associated with a greater cost of processing. The vast majority of downgrades occur because there is an increased level of fraud risk during the transaction, such as those done online when a customer is not present or in mail orders.

When a credit card is swiped in a retail setting, as we’ve described, it is significantly less expensive for the merchant.

A merchant will receive the ideal and least costly qualified rate when

  • the credit card is swiped correctly and all of the required information is correctly obtained;
  • a standard or common credit card is used;
  • the cardholder customer’s signature is correctly taken down electronically or on a sales receipt; and, finally,
  • the actual transaction is settled by the next day.

A merchant will receive the lesser mid-qualified rate when a credit card must be manually entered along with AVS security information, when consumer rewards cards are employed and when the transaction is not settled in a day’s time.

A merchant will receive the “most downgraded” non-qualified rate when a credit card must be manually entered but with no AVS security information; when a customer uses a corporate or government credit card; and when authorizations are manually input into a terminal and the actual transaction is not settled in two days.

When a credit card is processed in the course of a mail order, telephone order or online order setting, it becomes expensive for the merchant. When a merchant manually enters credit card information into a credit card terminal or software online after an order is made, or is collected through an online payment gateway, additional steps are required to ensure security. Fraud risk obviously increases when a cardholder is not present, which raises rates.

Ultimately, there are several processes that take place when merchants employ the use of credit cards in the course of their business operations. How these occur, of course, greatly determines the rates assessed for these merchant transactions. Keep this information in mind in order to make your overall rates as low as you can.