What is an Interchange Downgrade?

If your business accepts credit cards, you’re likely familiar with interchange fees—the often overlooked cost of completing a transaction. But what exactly are interchange fees, and how can they impact your business? Interchange fees are assessed every time a card is swiped, tapped, or entered. Each transaction is categorized into buckets based on the type of merchant, card, and how the card was processed. These categories, often referred to as interchange categories, determine the rate of fees you’ll pay. Ideally, your transactions land in the target category, the best-case scenario for minimal fees. However, when certain requirements aren't met, you could face what’s known as an interchange downgrade, which can significantly increase your costs.

Interchange downgrades are more common than many businesses realize and can cost you significantly in overpaid fees. In this article, we'll break down what causes an interchange downgrade, how to avoid it, and steps you can take to reduce the amount you're paying in interchange fees. With some careful oversight and optimization, you can lower these costs and improve your bottom line.

What Causes an Interchange Downgrade?

Each transaction your business processes is filtered into a specific interchange category. These categories are based on your industry, the type of card being used (credit, debit, prepaid), and the method of payment (in-person, online, keyed-in). For example, if you run a restaurant and accept a Mastercard debit card for payment, that transaction may fall into Mastercard’s card-present debit restaurant category, resulting in an interchange rate of 1.19% + $0.10.

However, things don’t always go according to plan. When a transaction doesn’t meet certain criteria, it can be downgraded to a more expensive category. Here are the most common reasons for interchange downgrades:

1. Stale Authorizations

When too much time passes between a transaction’s authorization and settlement, you risk a downgrade. Most modern systems batch transactions daily, minimizing this issue. However, if you run an online or business-to-business (B2B) operation, timely fulfillment is crucial to avoid downgrades.

2. Authorization Mismatches

If the amount authorized doesn’t match the final sale amount, you’re likely to experience a downgrade. For example, if a customer is authorized for $450 but later reduces their purchase to $425, failing to adjust the authorization could lead to a downgrade.

3. Failure to Use Required Security Features

Security is a major concern in payments, and failure to follow security protocols can trigger downgrades. For instance, failing to use an Address Verification System (AVS) to match a customer’s billing address can cause a downgrade, particularly in card-not-present transactions.

What Are Interchange Reimbursement Fees (IRF)?

When transactions are downgraded, they are recategorized into Interchange Reimbursement Fee (IRF) tiers—commonly referred to as EIRF (Electronic Interchange Reimbursement Fee) or SIRF (Standard Interchange Reimbursement Fee). These categories represent the fallback options when a transaction doesn’t meet the criteria for its target interchange tier.

For example, let’s look at Visa’s downgrade rates for transactions that fail to meet their target category:

• EIRF Rate: Debit Card – 1.75% + $0.20 | Credit Card – 2.30% + $0.10
• SIRF Rate: Debit Card – 1.90% + $0.25 | Credit Card – 2.70% + $0.10

As you can see, the further a transaction is downgraded (from EIRF to SIRF), the more expensive it becomes. Monitoring these rates and the causes behind downgrades is key to controlling costs.

How to Prevent Interchange Downgrades

While it’s impossible to avoid downgrades entirely, there are several best practices that can significantly reduce their frequency:

1. Batch Daily

Batching transactions daily ensures they’re settled promptly, reducing the risk of downgrades from delayed settlements. Many processors default to daily batching, but it’s always a good idea to confirm your setup.

2. Avoid Forcing Transactions

When security features such as AVS or CVV verification are bypassed, transactions are automatically downgraded into more expensive categories. Always ensure the necessary security information is collected before processing a payment to avoid these fees.

3. Monitor Offline Transactions

If your business relies on mobile or remote payments, there’s always a risk of transactions being delayed due to connectivity issues. When processing transactions offline, ensure they’re submitted as soon as a connection is restored to avoid exceeding the 48-hour settlement window.

4. Maintain Your Payments Equipment

Outdated or poorly maintained equipment can fail to capture the necessary information required for lower-cost interchange categories. Make sure your equipment is up-to-date, cleaned regularly, and configured correctly to prevent unnecessary downgrades.

5. Request Downgrade Reports

Your processor should provide detailed reports explaining when and why downgrades occur. By analyzing these reports, you can identify patterns and areas for improvement, potentially avoiding future downgrades.

Why Downgrade Prevention Matters

Interchange downgrades may seem like an inevitable part of doing business, but by understanding the causes and solutions, you can prevent many of these costly errors. Staying informed about your interchange categories, monitoring your transactions, and adopting best practices can save your business hundreds—if not thousands—of dollars in unnecessary fees.

At Swipesum, we specialize in helping businesses optimize their payment setups to reduce costs like interchange downgrades. Whether you need help with your current system or want to explore new options, we’re here to assist. Contact SwipeSsum at save@swipesum.com or call (314) 390-1461 for a consultation today.

By mastering the art of minimizing downgrades, your business can thrive in an increasingly competitive landscape, turning those hard-earned savings into strategic investments for growth.