Credit Card Merchant Processing: Dealing With Dreaded Downgrades
Every business owner dreads the downgraded charge. It’s a way for merchant service providers to rake in more fees due to a customer using a card that charges a higher-than-normal rate, or the transaction being entered incorrectly. Your mission is to avoid these fees at all costs. Here’s how.
What’s A Downgrade?
A “downgrade” is a transactional fee charged that’s higher than it would otherwise be because of some fault in the card processing. Generally speaking, there are three tiers that a merchant services provider will charge you for processing transactions:
The qualified rate. The qualified rate is the lowest rate charged by the service provider. This is the rate you want to shoot for all the time. It’s the swipe rate (the rate you pay for swiping the card through the terminal). Service providers see this as the lowest-risk transaction because the credit card information is not being recorded or analyzed by the merchant or employees. Data is sent directly instead of being types in.
The mid-qualified rate. The mid-qualified rate is the rate charged when some security protocols are not followed and some are. For example, you may verify the customer’s ID, but you may be keying in the credit or debit card.
The non-qualified rate. The non-qualified rate is the highest charge possible through your service provider. It’s the rate you pay for manually entering in credit card information without security checks or customer ID. Obviously, the service provider sees this as a major risk – hence the added cost to you.
If you spend some time reading Authorize.net reviews, you’ll see that even these rates can vary from company to company. But, in general, the downgrade is something you want to avoid because it always means paying more, all other things being equal.
Reasons For Downgrades
You can be downgraded for any number of reasons. But, the most common reasons include processing errors. For example, if you do not physically swipe the card, you can be downgraded to the mid-qualified rate. So, it pays to keep swiping the card until it goes through.
Sometimes, when AVS information is not entered, you will experience a downgrade. When batch processing isn’t settled within 24 hours, or a card is a rewards or business card, you may be penalized by a downgrade.
With business cards, it’s easy to see when you will suffer a downgrade, but you won’t necessarily want to turn away the customer – especially if the majority of them are businesses.
With rewards cards, it’s almost impossible to tell whether the card will result in a downgrade beforehand. Some older cash-back rewards cards can be especially expensive to merchants to process, since the cash back results in an additional 1 to 3 percent cost to the merchant service provider, which passes those costs on to you.
You may find yourself bumped from qualified to non-qualified with one of these cards, paying the highest rate offered by the service provider.
Another reason you may be downgraded is failure to comply with PCI requirements. These security checks ensure that your customer’s sensitive financial information is safe. It’s a check that you must do every year.
Some service providers handle this for you, but many don’t. Some simply require you to have an audit done on your website or your business, but the payment provider actually handles the bulk of the paperwork.
Avoiding downgrades is easy – don’t commit any of the common payment errors. Easier said than done, right? Basically, the trick to staying compliant and paying the lowest fees is to set internal protocols and procedures for processing transactions. You might follow all of the rules, but your employees may not, or may not understand the importance of such procedures.
Internal protocols will help with continuity across the company so that all employees are following qualified rate procedures.
Jessica Bunn’s years of business experience span a successful career. With an eye for efficiency and a passion for small businesses, she often writes about her insights on a variety of business and entrepreneur blogs.