You have probably heard the term “downgrading” in reference to payment processing fees and wonder what it means exactly for what you will be paying. Downgrades are an avoidable expense when accepting debit and credit cards but understanding and catching them can be a bit tricky. One of the easiest downgrades to avoid is the Address Verification System (AVS) downgrade. Here’s what it is and how to avoid inflating your merchant services statements.
How Downgrades Work
When you process a signature debit or credit card, it will be assigned an Interchange category with its own rate and fee that will be used by your merchant services processor to determine the transaction’s cost. All transactions will have a target category with the lowest rates and fees.
Downgrades happen when a transaction gets categorized into a higher price. This increases the cost of the transaction. Some downgrades are related to processing software and hardware but most are related to how you authorize and settle transactions. While most merchants are responsible for their own downgrades, this also means you can change your payment processing behavior to get fewer downgrades and better rates.
What Happens When You Don’t Use the Address Verification System
One of the most common downgrades happens when you don’t use the Address Verification System tool. This fraud deterrent lets you know if the address the cardholder provided is the same as the address on file with the issuing bank. To get the best rates, you must provide address information for card-not-present transactions. If you do not provide the customer’s zip code, your transaction will be downgraded. The AVS prompt helps confirm that the card actually belongs to the individual who is using it.
By using the Address Verification System when you manually key in credit card information, you may qualify for the low Interchange rate of 1.80% + $0.10 for the transaction. By skipping this simple prompt, your business can be charged the higher rate of 2.80% + $0.10.
While this may not sound like a lot on a per-transaction basis, it certainly adds up, especially for high volume businesses.
Other Behaviors That Can Cause Downgrades
The AVS downgrade is one of the most common reasons merchants pay for downgrades but it isn’t the only cause. There are two other factors in your control that can help you secure the lowest possible Interchange rates on transactions.
The first is how you process card-present transactions. When the card is present, it should always be swiped if possible. A card-present swiped transaction will give you the lowest category you can qualify for. Manually entering card information automatically downgrades the transaction with a higher rate because there is a greater risk of fraud. This can mean the difference between 1.51% for swiped transactions and 1.80% for manually entered card-present transactions, for example.
Finally, no matter how transactions are entered, it’s also important to be aware of the settlement timeframe. Your batch should be settled within 24 hours for the lowest possible rate. If you settle your batch after 24 hours, every single transaction will have a higher rate. If you don’t settle for 48 hours, every transaction will receive yet another downgrade and the highest possible rates for the whole batch.