Most businesses need the ability to accept payments by credit or debit cards to maintain current customers and attract new ones. When it comes to credit card processing, there are a number of fees associated with merchant accounts that are assessed to the business. Since processing fees can vary from business to business, smart owners need to know how to avoid downgrade fees when accepting credit or debit cards.
Downgrade fees are surcharges added to the discount rate of the total processing fee for each transaction. Downgrade fees can be called by any number of names, so terminology may vary by credit card processing companies. Downgrade fees can be assessed on a merchant for such reasons as the type of card used, the bank which issued it and how the transaction is entered. Merchants using the Tiered Pricing Model are hit the hardest with downgrade fees, with over 50% of their transactions being hit with downgrade fees. The fees usually cost merchants up to 3% more per transaction, and can be reduced or eliminated by instead using the Interchange Plus pricing system.
Downgrade fees most often occur on card-not-present transactions, such as those purchases made online. The fees are assessed on these transactions because the credit card processing company has determined there is more risk involved regarding possible fraud, identity theft or other inappropriate use of the card. In most circumstances where the merchant does not physically handle the card, a downgrade fee is assessed. The best way to avoid these fees is to require customers to give as much specific information as possible to reduce the risk associated with the transaction. This can include such information as the CVV Code, which is the 3-digit security code located on the back of any credit or debit card. When a merchant requests this from a customer, the processing company sees another layer of security being added and usually does not apply the downgrade fee.
Other types of information merchants can gather to reduce or avoid downgrade fees include a customer’s billing address, ZIP code and numerical street address. These fall under the Address Verification System, or AVS. So the best way to avoid downgrade fees on merchant accounts is to gather as much information as possible from customers at the time of the transaction. By doing so, business owners can save money while ensuring proper security for themselves and their customers.