Payment processing fees are a significant expense for many businesses, and one of the more obscure contributors to higher costs is something called a downgrade. These fees often slip by unnoticed but can add up to a considerable amount over time. Understanding what downgrades are, why they happen, and how to prevent them is essential for any business that accepts card payments.
What Are Payment Processing Downgrades?
A payment processing downgrade occurs when a transaction fails to meet the criteria required for the lowest available interchange rate and is instead charged at a higher rate. Each transaction flows through a complex network involving the card brand (like Visa or Mastercard), the issuing bank, and the payment processor. If the transaction isn’t processed optimally—due to missing data, delayed settlement, or other factors—the interchange rate gets bumped to a more expensive category.
Processors categorize these rates into tiers like “qualified,” “mid-qualified,” and “non-qualified,” though the specific terminology can vary. A downgrade typically means the transaction has fallen from a qualified to a mid- or non-qualified rate, increasing the merchant’s cost.
Common Causes of Downgrades
There are several key reasons why transactions may be downgraded:
- Late Batch Settlement
Most card networks require that transactions be settled (i.e., the batch is closed) within 24 hours to qualify for the lowest interchange rates. Delayed batching often triggers a downgrade. - Manually Keyed Transactions
Transactions that are manually keyed in—such as when a cashier types in a card number instead of swiping, dipping, or tapping—are considered higher risk. If address verification (AVS) isn’t used, the risk and rate increase further. - Missing or Incomplete Transaction Data
Some card types, like commercial or purchasing cards, require additional data (known as Level II or Level III data) for the transaction to qualify for lower rates. If this data isn’t provided, the transaction is automatically downgraded. - Using Non-EMV-Compliant Terminals
Card-present transactions processed on non-chip (magstripe-only) readers are more susceptible to fraud. As a result, these transactions often qualify for higher interchange rates. - Card Type and Transaction Method Mismatch
Certain card types, such as rewards or corporate cards, have stricter rules for interchange qualification. If these rules aren’t met—for instance, if the transaction lacks enhanced data fields—the card brand applies a higher rate.
How Often Do Downgrades Occur?
While the exact rate can vary widely, it’s not unusual for 5% to 20% of a business’s card transactions to be downgraded, depending on the business model, card mix, and internal processes. Merchants that accept a large share of card-not-present transactions (like phone or online orders) or process corporate cards more frequently may see a higher percentage of downgrades.
How to Minimize Downgrades
Although downgrades are common, they are often preventable. Businesses can take the following steps to reduce their occurrence:
- Settle transactions daily to ensure compliance with interchange timing rules.
- Use EMV-compliant terminals and avoid manual entry when possible.
- Implement AVS for all keyed transactions.
- Ensure Level II and Level III data is passed when accepting business or purchasing cards.
- Regularly review processing statements or consult with a payment expert to identify patterns and make corrections.
By addressing these factors, businesses can improve their processing efficiency and reduce unnecessary costs—turning invisible fees into visible savings.