23 Mar What are Downgrades in the Merchant Account Industry?
Credit card processing companies charge fees to merchants who use their services. These fees are normally set at a fixed percentage on a per-transaction basis, and the rate varies depending on the pricing tier that a particular merchant is at. When a credit card is used to purchase something at their business, a percentage of the total amount is set aside, tallied up at the end of the month and given to the credit card processing company.
These fees can add up to thousands of dollars per month or more depending on how much you make in credit card revenue and what tiered pricing level you were given. Merchant account holders fear downgrades because that term generally means they have to pay more money in credit card fees each month.
What are Downgrades?
In simple terms, a downgrade occurs when a customer uses a type of credit card that requires a higher processing fee or the merchant account holder processed the transaction incorrectly. While normal credit card processing fees range from 1 to 2 percent per transaction, downgrades can raise these rates to 2.5 percent or 3 percent.
At the end of the month, you can calculate your effective rate by totaling up your credit card receipts and multiplying that number by the rate you think you should be getting. If your answer is lower than the amount being paid to your credit card company, you’re paying a significant amount of money in downgrades.
How Can Downgrades Be Reduced?
You can use the following tips to help you stay at the “qualified level” for credit card payments. This is the level that charges the smallest amount of money per transaction:
- The consumer uses a standard credit card.
- The card swiped the consumer is done so properly.
- You get the customer’s signature.
- The credit card batch is settled within 24 hours of the swipe.
If a customer uses a corporate, government or international credit card, you’ll be charged a higher rate for those transactions.
Another way to ensure that you pay less in credit card transaction fees is to only allow customers to pay with specific types of credit cards. Try to stick to the major credit cards and avoid any type of reward-based cards, if possible.
If you accept credit cards online, the same standards are used to determine the rate you pay. You must use address verification to ensure the customer’s card is valid, and an invoice or receipt number must be generated and given to the client at the end of the transaction.