Information on Merchant Accounts,
Ecommerce and Credit Card Processing

August 11th, 2005 by Jamie Estep

Why am I downgrading? – Part 1/3 – Reasons

Filed in: Merchant Accounts, My Favorite Posts |

This topic will consist of three posts; the first covering common reasons for a merchant account to downgrade, the second will cover ways to help prevent transactions from downgrading, and the third will cover case studies putting these methods into action.

I will also reference a great article written in the Green Sheet, called Interchange Untangled. It is lengthy, but is the best source for transaction downgrade information that I have found, anywhere.

Credit card downgrading is common in every business merchant account. A transaction downgrade is where the transaction fails to meet certain pre-defined criteria, and an additional charge is added to the fee for processing the transaction. Some businesses see many downgrades while others may only see a small percentage of downgrades. There are generally 2 levels of downgrading, MID-qualified and NON-qualified. MID being the first downgrade level and NON being the highest downgrade level with the greatest additional fee associated with it.

To understand what causes a card to downgrade, you must first know what a transaction needs to fully qualify and to not downgrade. In credit card processing, downgrading is synonymous with risk, meaning that only the lowest risk transactions fully qualify. The lowest risk transaction would be a transaction from an American consumer’s credit card, successfully swiped through a mag reader (Credit Card Terminal, PC Mag Swiper, etc.) and successfully batched the same day as the transaction. If a transaction does not meet any of these criteria, it downgrades.

Face-To-Face requirements for fully qualifying a transaction:

  • Card-holder, merchant and POS device must all be present at the time of sale.
  • Card must be swiped.
  • Only one authorization is allowed per transaction.
  • Merchant must batch within 24 hours of processing the transaction.
  • Merchant must obtain the authorized cardholders signature.
  • Restaurant transaction must be within 20% (Visa), 25% (MasterCard) of the authorized amount (Tip Compensation).

Card Not Present Requirements for qualifying a transaction:

  • Presence of card or customer not required.
  • Authorization request must be approved.
  • Signature not required on receipt.
  • One authorization per transaction with one allowed reversal to equalize authorization amount.
  • Transaction must clear in two days, and include: purchase date, customer service phone number, URL or email address (if applicable), order number, mail/telephone order specification, ecommerce indicator, total authorized amount.
  • AVS required on all non-recurring and the first of a recurring transaction.
  • AVS not required for subsequent recurring transaction less than one year apart.

The exception even if all requirements are met, is if the credit card being processed is not a standard consumer credit card. International, corporate and business credit cards will almost always downgrade to a MID or NON qualified level. Once again, this is due to a higher risk of processing a business or international card than a consumer credit card. The way around corporate downgrading is a business-to-business merchant account, which will be discussed tomorrow.

Overview of the common downgrade reasons:

  • Accepting a business or international credit card.
  • Keying-in a credit card, instead of swiping.
  • Failing to batch within 24 hours of making a transaction.

Next topic is steps a merchant can take to help reduce and prevent downgrades.

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