If your business accepts credit cards, you’re probably familiar with interchange. Interchange, in simple terms, is the cost of completing a transaction. Every time a card is swiped, the transaction is filtered into a number of buckets based on the merchant type, card type, and how the card was accepted.
These buckets are often referred to as interchange categories and determine what interchange rates will be assessed on the transaction.
New transactions are assigned to what is called a target interchange category, or the best-case-scenario category. Basically, if the transaction goes according to plan, you’ll pay the interchange fees associated with the target category. Sometimes, transactions can move between categories when requirements of a given tier are not met or additional information is provided. That recategorization is called an interchange downgrade.
Downgrades are complicated. If you don’t understand how they work, you may be throwing money away. Today, we’re going to cover interchange downgrades: what they are, how they happen, and what you can do to avoid overpaying in interchange fees.
When a transaction is initiated, your processor will filter it into interchange categories based on your merchant type, the type of card used, and how the card was accepted. As an example, if your customer provided a Mastercard debit card to pay for their purchase at your restaurant, the transaction would likely be filed under Mastercard’s card-present debit restaurant category, resulting in an interchange rate of 1.19% + $0.10 (see Mastercard’s interchange rates here).
In some cases, however, the processor does not have all the information they need in order to properly categorize a given transaction. For example, some card-not-present tiers require that the transaction first be authorized then settled within a given period of time. If the transaction is not settled within that period, it will be downgraded from its target tier to another (more expensive) category.
Here are some of the most common causes of interchange downgrades:
If too much time has passed between the day the transaction was initiated and when it was completed, you could face a downgrade. Most modern equipment is set up to batch daily, so you likely won’t see these very often. However, if you run an online store or B2B organization, it’s important to fill orders in a timely fashion to prevent these downgrades
Let’s say that someone comes into your business, and you ring them up for $450 worth of merchandise. You’ve obtained the authorization to approve the transaction, but then the customer wants to remove one of the items, to bring their total down to $425. If you don’t cancel the transaction and redo it, you’ll face a downgrade. The sale amount should match the authorization amount, no matter what. Otherwise, you’ll find yourself paying additional fees.
The payments industry takes card security very seriously. As a result, they require certain security practices of all merchants. Whether or not these security features are used can decide your interchange rates. For example, if a merchant fails to verify the customer’s billing address using an address verification system (AVS), they could face an interchange downgrade. The billing address associated with the transaction should be consistent with the address on their card account.
Of course, why a downgrade occurs is entirely dependent on the target interchange tier in which the transaction is categorized. Generally, brick-and-mortar stores shouldn’t expect to see downgrades all that often, but online stores and B2B organizations could experience them regularly. This is because these businesses tend to operate in stricter interchange categories, such as those where the card is not present or commercial cards are commonly used.
In the context of interchange downgrades, it’s fairly common to hear about Interchange Reimbursement Fees, often referred to as IRF. Basically, IRF categories are the catch-all downgrade tiers. If a given transaction fails to meet the requirements of its target interchange tier, it will be recategorized into an IRF tier.
Generally, there are two IRF categories: electronic (EIRF) and standard (SIRF). When a transaction is downgraded from a target category, it is first downgraded to EIRF. Like any other interchange category, EIRF has requirements:
In cases where these requirements are not met, the transaction will be further downgraded to the standard interchange reimbursement fee (SIRF) tier. This is the furthest that a transaction can be downgraded, and thus the most expensive.
To understand the difference in rates, let’s take a look at Visa’s IRF rates:
EIRF RateSIRF RateDebit Card1.75% + $0.201.90% + $0.25Prepaid Card1.80% + $0.201.90% + $0.25Credit Card2.30% + $0.102.70% + $0.10
Both EIRF and Standard IRF downgrades will show up on your processing statements. Usually, they’ll be abbreviated to EIRF CR or STD CR. It’s wise to keep an eye out for these on your processing statements so you can see how much money you’re losing to these increased fees.
It’s not possible to avoid interchange downgrades completely. Some factors are completely out of your hands, so don’t stress if you see downgrades on your statement from time to time. You can, however, adopt some best practices that should prevent regular downgrades:
Batching is when transactions are passed from your POS system to your processor to be completed. As we stated earlier, most modern processors default to daily batching, but depending on your provider, you might see weekly or monthly batches. Any transaction that is not completed within 48 hours of its initiation is subject to interchange downgrades, so its best to batch daily to make sure no transaction ever meets that threshold.
As we discussed above, card security is a big deal in the payments industry. As a merchant, you have the option to bypass security features by forcing a transaction to your processor. This allows you to complete the transaction without verifying the necessary security information. Some merchants will skip these steps to save a little time on the transaction. We strongly discourage this. Doing so will automatically push your transactions into an EIRF category, making them much more expensive. It’s best to take a little more time to complete the transaction to save on the cost of the downgrade.
Your system might be pushed offline from time-to-time. We all face power and network outages, but don’t assume your system is fixed as soon as the lights come back on. Offline transactions are all stored within your POS system until a network connection is reestablished. That means, depending on how long the disconnect lasts, you might not be able to complete the transactions within the 48-hour window, no matter how often you are set up to batch. This is especially important for mobile businesses to consider. If you take your business on the road, make sure that transactions are properly processed as soon as you regain an internet connection.
This might sound strange, but it’s important. If your equipment is dirty, out-of-date, or improperly set up, there’s a chance that it might not be collecting all the data it needs to properly process transactions for your business. Make sure to regularly assess the condition of your equipment to ensure that it’s optimized for secure transactions.
While it may be nearly impossible to correct all downgrades, your processor should allow you to track why they are happening. If you’re alarmed by interchange downgrades on your statement, request a downgrade report from your credit card processor. This report lists instances in which the target interchange tier requirements were not met and an explanation. These reports should give you clear insight into what you can change to reduce interchange downgrade fees.
Downgrades are complicated. Knowing your interchange category qualifications will help you stay on top of these authorization and settlement deadlines. Yes, they may be out of your control from time to time, but understanding how they affect your business will help you avoid fees like this in the future.
If you’re still confused about interchange downgrade fees on your monthly processing statement, the experts at SwipeSum.com are here to help! We are happy to help you optimize your existing setup or find a new one to reduce interchange downgrades. Visit us at SwipeSum.com, email firstname.lastname@example.org, or call (314) 390-1461 to get started!