Downgrades and Penalties



When accepting credit cards at your business, it is important to know the details of what rates you are paying and how you can avoid unnecessary fees.

Qualifying for the best rates may seem like an easy task, but it is essential for a business to understand when a transaction is penalized and raised to a higher rate – a practice called downgrading.

Before understanding how a transaction is downgraded, it is first important to know what Interchange is. Interchange refers to the fees charged by the issuing banks (like Wells Fargo and Chase) to the merchant to accept their credit and/or debit cards. The fees cover a number of different categories of the payment, including billing services, credit risk, fraud risk, and float, so the cardholder’s funds can be converted to a cash deposit in the merchant’s bank account.

In addition, the card associations like Visa and Mastercard charge what is called Dues and Assessments for each credit card transaction. These fees are charged mainly for the use of the card associations’ networks and systems and are regularly updated to promote more card issuance and acceptance.

Every credit card transaction has a rate associated with it, and those rates vary by many different factors: the industry of the business, the way the card is accepted (swiped vs keyed-in), the size of the transaction, how much secure information is captured from the card, and other discrepancies.

Let’s get back to downgrades. When a transaction gets downgraded, it will then be penalized to one of the following interchange rates: EIRF or Standard.

Downgrades occur more often than you would think, and for reasons that may even seem a bit strange. Here are a few different ways a transaction could be downgraded, or penalized to a higher rate:

  • A transaction was manually entered without the card security code (CSC) and/or the billing address or ZIP.

  • A transaction was not settled during the same day that it was authorized, so it becomes what is known as a “stale authorization.”

  • A valid electronic authorization code was not provided when forcing-entering a transaction, and it was settled.

  • A tip adjustment larger than 15% will downgrade to EIRF.

EIRF stands for Electronic Interchange Reimbursement Fee, and is the first downgrade level a transaction could hit. Using the second downgrade example above with a Classic Visa card that qualifies at the CPS/Retail category (normally 1.51% + $0.10) – if is not settled within 24 hours of the transaction time and becomes a stale authorization, the effective rate will increase by .79% to become 2.30% + $0.10.  On a $100 transaction, that is an increase of $0.79. That amount only gets larger if the transaction has a smaller total.

Standard downgrades are the highest penalties you can be hit with and certainly do not want to become ‘standard’ practice when processing transactions.  Consequentially with the same example from above, a stale authorization not settled within 48 hours downgrades further from EIRF to Standard. The Classic Visa card that normally qualifies at the CPS/Retail category will be penalized an additional 1.19% if this happens, resulting in an effective rate of 2.70% + $0.10.  

Merchants who are set up on a Discount, or Tiered, pricing schedule can see these downgrades penalize them to a Non-Qualified rate, which is the highest, or most costly, rate that they can be assessed.  These often can be tougher for the merchant to spot on their statements due to the lack of transparency involved in this type of pricing and reporting. 

So what can a merchant do to identify if they are currently subject to downgraded transactions and how can they potentially avoid these costly mistakes?  Contact PolyPay today to arrange a statement consultation. One of our employees will walk you through a statement review and construct an approach for you to process transactions in most cost-effective way possible.