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Interchange Downgrades: What They Are And How To Avoid Them

Posted: September 14, 2021 | Updated: November 30, 2022

Interchange downgrades are a pretty complex subject to grasp. But, if you don’t take the time to learn how they work, you could be throwing a massive amount of your money down the drain each year.

Though many are avoidable, they are unfortunately quite common. Some providers intentionally allow customers to continue to experience downgrades because they make money in the margins based on their pricing strategies. In this article, we will be going over the fundamentals of an interchangeable downgrade, why they occur, and the things you can do to avoid them.

What Is An Interchangeable Downgrade?

Although you may not be familiar with this, interchangeable downgrades can happen anywhere and at any time. You may already be familiar with the term “interchange,” which is the cost card brands charge to conduct a credit or debit card transaction. 

So, each time you process a credit or signature debit card, it gets assigned to an interchange category. Each category differs depending on their rates and fees, which processors calculate the transaction’s cost. If everything runs smoothly, then each of the transactions will reach their target interchange category, which is a category that has the lowest possible rate and fee given the type of transaction. 

However, things can go wrong during this process. Whether this is because there wasn’t enough information provided or there were particular requirements that weren’t met, it allows transactions to jump from one category to another. This re-categorization can cause a transaction to be placed in an interchange category priced higher than the target category. 

When something like this happens, the rate increases, resulting in a more expensive transactional cost, and therefore the transaction has “downgraded.”

Why Do Interchangeable Downgrades Happen?

Unfortunately, downgrades are not uncommon to experience nowadays, and there are even specific situations that will immediately set off an interchangeable downgrade. The payment software, equipment, and processes that run the transactions play a massive role in ensuring everything goes according to plan. 

Not only that, but the more significant number of downgrades is because of how the business processes each transaction, or in other words, how it settles and authorizes transactions. Since these businesses tend to be the root of their downgrades, it welcomes the opportunity to look at the processing behavior to remove or reduce these downgrades.

What Are The Most Common Causes Of Downgrades?

Before you learn the ways, you can avoid these downgrades. It is essential to understand some of the common causes behind them, which are listed below:

  • Delayed Authorization

A “stale” authorization is another term for this situation. It happens when the interval between the first authorization and the credit card settlement is too long, usually exceeding 48 hours.

Authorizations must be settled for a business to receive money from a transaction. Cardholders must allow enough time to pass between authorizations and settlement. This will make sure they get their money in full in a timely way.

Many of them state the authorization needs to be settled within the first 24 hours, so you should make sure your batch settles at least once a day to avoid reductions due to stale approvals. If you don’t settle your transactions quickly enough, the authorization will expire, and the transaction will most likely downgrade.

  • Mismatched Authorization

It occurs when authorization and settlement amounts differ when they must always match. 

For a better understanding, let me give you an example:

Let’s say you are working as a cashier at a grocery store, and one of your customers just purchased $300 worth of items. You’ve swiped their card, but your customer decides they don’t want to buy a product.

When this change of heart happens, it brings their total down to $275. So now, the settlement amount is at $300 while the settlement amount has lowered to $275. You have to cancel the transaction and do it again; otherwise, you risk a downgrade. 

  • Failing To Use AVS

AVS stands for address verification system, a customer address verification tool that provides an extra layer of security for customers while at the same time simplifying the process for our payment gateway. The customer’s five-digit zip code, which stands for their address information, is necessary for card-not-present transactions to target their interchange categories. If a customer fails to enter their zip code, the transaction will downgrade.

How Can You Avoid Interchangeable Downgrades?

Although downgrades can’t always be avoided, you can make sure it doesn’t become a casual occurrence by following the measures listed below:

  • Pay special attention to the provider you are using, check that they offer different pricing programs that meet your needs, and provide all the information necessary about the practices you should follow.
  • Make sure AVS is required on any keyed transaction. Any trusted provider should make sure this feature is a requirement to avoid a breach in security and therefore downgrades. 
  • Always enter your sales tax and tip amounts separately from the total of your transaction. With a trusted provider, the system you are using for your transactions should have, without exception, separate fields for each amount to avoid mismatched authorizations.
  • Schedule your daily credit card batches to avoid stalling authorizations. You can even set up most POS systems, so your batches are settled automatically at a specific time every day. 

Final Thoughts

You need to understand every aspect of your credit card processing fees, and learning about interchange downgrades is an excellent way to start. Although they aren’t usually discussed, they are a widespread incident and can put you at a considerable disadvantage. However, now that you know all about them and the ways you can prevent them, this situation is bound to become a rare occurrence in your life. 

We hope you found the information valuable and exciting. Let us know in the comments other vital things you think we should know about our credit cards and processing fees. We would be glad to provide you with any extra information you need.

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