Information on Merchant Accounts,
Ecommerce and Credit Card Processing

August 12th, 2005 by Jamie Estep

Why am I downgrading? – Part 2/3 – Preventing

Filed in: Merchant Accounts |

Many businesses may be able to prevent or eliminate their downgrade charges. This post will focus on ways to help eliminate or prevent downgrade charges. There are several simple methods that can be used to help prevent downgrades, and there are more involved methods that involve multiple merchant accounts or the restructuring of the merchant account type.

By analyzing the differences in customers from business to business, and the method that businesses use to accept credit cards, I find that for some, downgrading is inevitable. Some businesses will always downgrade. Their customers are always international, they are unable to use AVS, or some other reason beyond their control will prevent them from qualifying their transactions. For these businesses, my best advice is to negotiate. Downgrade charges can often be negotiated by talking with your current processor.

As for other businesses, these methods are primarily intended for Retail merchants who swipe their credit cards. Keyed entry merchants have much less of a problem with downgrading, and most downgrading can be prevented by using AVS.

Simple Fixes:

• A Good Processing Company
• Pin Debit
• Use AVS and Batch On Time
• Make Sure You’re Processing Through The Right Account Type

A Good Processing Company: The first thing that you need, for reducing your downgrade charges, is a good merchant service provider and a good processor. This combination will help you get the lowest rate and will give you the best service. A company that is trying to rip you off will rarely help you to save money. A good company wants your business, and will do what they can to make you happy. If you are not happy and processing, the provider makes nothing, and a good company will know this. A good company will also try to lower your downgrade fees, although not always possible, if you ask them to.

Pin Debit: Often overlooked is the pin debit system. This system is where your customers enter their pin number into a pinpad similar to using an ATM machine. Using Pin debit will reduce your overall processing fees, and will also completely eliminate any potential downgrades for Pin Debit transactions. A Pin Debit transaction cannot downgrade, and can very rarely be charged back. A pinpad will cost you $80 – $200, but this investment can be quickly paid for in saved processing and downgrade fees. I highly recommend a Pin Debit system for any retail business not only to help save money, but as a convenience to your customers.

Use AVS and Batch On Time: Using AVS (Address Verification System) when you have to key in a transaction will normally prevent a downgrade from going to NON-qualified. Batching on time will prevent your transactions from downgrading due to failing to batch within 24 hours of a transaction. Again these are both easy thoughtless ways to help prevent downgrading that many businesses overlook.

Make Sure You’re Processing Through The Right Account Type: As simple as this sounds many business are initially setup as the wrong account type. If you are setup as Keyed Entry and you swipe your transactions, you are paying much more than with a swiped merchant account. Conversely, if you are setup as swiped, and you key in your transactions, every one of them will downgrade. Ensuring your account is setup correctly is imperative to reducing or even understanding your merchant account’s fees.

Permanent Fixes:

• Multiple Merchant Accounts
• Business-To-Business Merchant Accounts

Multiple Merchant Accounts: Setting up multiple merchant accounts applies to businesses that process both swiped entry and keyed entry transactions. By default, if you have a swiped merchant account, all of your keyed entry transactions will downgrade. On the reverse end, if you have a keyed merchant account, all of your swiped transactions will process at a much higher than swiped rate. By using two merchant accounts, one for swiped, and one for keyed, you will get the lowest rate for each type of transaction. There are several terminals that can run multiple merchant accounts without any additional configuring.

Business-To-Business Merchant Accounts: Many businesses downgrade because they cater mainly to other businesses. Business, corporate, and government credit cards will downgrade even if they are swiped, because Visa and MasterCard associate a higher risk with non-consumer cards.

Visa and MasterCard use a 3-tier system to qualify non-consumer cards for businesses setup with business-to-business processing. Depending on the type of card, it will need to be processed on one of the three tiers to be a qualifying transaction. Once you are setup with a business-to-business merchant account, additional qualifying information needs to accompany each transaction. Each tier requires certain information to qualify the transaction on that tier, and the amount of required information increases with each tier. Tier 3 transactions require significantly more additional information that tier 1 transactions.

Most Tier 1 and 2 transactions can be run through a standard credit card terminal. Tier 3 transactions require so much information that a special software system needs to be setup to collect and transmit all of the extra information. I only recommend tier 3 business-to-business processing for large ticket businesses or businesses who are already going to use a tier 3 compatible processing program and have ample time to enter and process the transaction. Tier 1 and 2 are fairly simple to setup and the affect on processing a transaction is minimal.

If your business does not have the possibility of business-to-business, or multiple accounts and you are still downgrading excessively, you should ensure that you are using good practices to process your transactions. Depending on your customers and your businesses location you may be taking large volumes or corporate or business cards and not ever know it. Even with a business-to-business to multiple account system, international card downgrades are still unavoidable.

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