What is a Downgraded Transaction
A “downgraded” transaction actually costs you more money to process than it should have. Downgrades are completely avoidable if you know how to catch them. We will share at least three areas that can save you money on your transactions. While we may be talking pennies on the dollar, those pennies add up over the course of the year and can easily amount to a steak dinner for two.
How a downgrades works
Every time you process a debit or credit card, the transaction is assigned an Interchange category with its own rate and fee that will be used by Chosen Payments to determine the cost of the transaction. All transactions have a target category to locate the absolute lowest rate and fees for the transaction.
A “downgrade” occurs when a transaction gets categorized into a higher price. This increases the fees and total merchant cost of the individual transaction. Some downgrades are related to processing software and hardware but most downgrades are related to how you authorize and settle transactions. Most merchants cause downgrades to happen through a lack of merchant education. We will share information with you to change your payment processing procedures to get fewer downgrades and that results in lower rates.
The AVS Downgrade
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 transaction costs. The AVS system is a fraud deterrent that lets you know if the address the cardholder provided you is the same address the credit card statement is mailed to each month by the issuing bank. To get the best rates, you must provide the address information for card-not-present transactions. If you don’t enter 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 and avoid fraud. Skipping that step increases the risk of fraud so it costs you more money to be risky.
By using the Address Verification System when you manually key in credit card information, you may qualify for an Interchange rate of 1.80% + $0.10 for the transaction. If you skip this step you could find yourself paying the higher rate of 2.80% + $0.10. That’s a full point added just because you skipped a simple prompt. Perhaps you do this because someone is personally known to you. While this may not sound like a lot on a per-transaction basis, it certainly adds up, especially for high volume businesses like funeral homes, auto repair shops and ground transportation companies. We specialize in these industries and frequently see merchants making this simple mistake. Recently a funeral home processed an $8000 transaction. What should have been a processing cost of $144.10 ended up costing the funeral home $224.10 or a full $80.00 more than it should have cost. There went that steak dinner down the drain over something that literally would have taken 15-seconds or less to enter.
Other Behaviors That Can Cause Downgrades
While the AVS downgrade is one of the most common reasons a merchant causes their processing rate to increase, there are at least two other factors in the control of a merchant. The first is how you process card-present transactions. When the card is present, it should always be swiped. A swiped transaction provides the absolute lowest category you can qualify for. If you manually enter card information, the transaction will be automatically downgraded to a higher rate because, again, there is greater risk of fraud. A swiped card might have an Interchange rate of 1.51% for a swiped transaction versus as rate of 1.80% for a manually entered transaction.
One other way you can avoid a downgrade is to be aware of that your settlement timeframe does matter. Your batch should be settled within 24 hours for the absolute lowest possible rate. If you settle the batch more than 24 hours after a transaction, every single transaction in the batch will have a higher rate. If you wait beyond 48 hours, every transaction will receive yet another downgrade and all will process with the very highest possible rates for the entire batch. This is one reason we recommend auto-batching for all of our clients.
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