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  • 07 Dec 2023

  • 08:30 AM GMT

What Are the Top Ways to Identify and Reduce Interchange Downgrade?

What Are the Top Ways to Identify and Reduce Interchange Downgrade?

Interchange refers to the fee debit and card companies charge to process a transaction. The associated rates vary and depend on several factors. Some common influencing factors include: 

  • Industry segments
  • Card brands
  • Transaction modes

Conversely, an interchange downgrade can harm your business's financial health. This occurs when a transaction fails to meet the requirements set by the target interchange categories, leading to its reclassification into higher, more expensive categories.

It's important to note that most interchange downgrades are avoidable. Unfortunately, many businesses pay higher fees due to merchant errors or delays in processing by service providers, who often profit from these situations.

What Causes an Interchange Downgrade?

A few prominent reasons are associated with interchange downgrades, which merchants must remember to avoid untoward expenses.

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Some of the reasons are listed below: 

  • Stale Authorizations

Stale authorizations refer to transaction authorizations that are unauthorized and unapproved within the allotted timeframe (usually 24 hours).

  • AVS Mismatch

Address Verification Systems (AVS) is a mandatory exception tool for card-not-present transactions. The AVS tool uses the customer's billing address and zip code details to prevent fraudulent transactions. If there is a mismatch between the user's details and the system's details, it can lead to an approval delay.

  • Batch Settlement Exceeds 24 Hours of Authorization

Transaction batches are passed from the POS system to the processor for daily completion. Most processors utilize a daily batching mechanism, while others also resort to weekly and monthly batches. Any transaction with authorization spreading beyond 48 hours is subject to interchange downgrades.

  • Failure to Use Required Security Features

Security features are essential in ensuring fraud-free transactions for all customers and merchants alike. However, when processors don't heed the various security measures, they fall prey to interchange downgrade.

While security features like AVS play their role, there is an additional dependency on the business type and the mode of transactions. For instance, brick-and-mortar stores would notice fewer cases of interchange downgrade, whereas online and B2B stores will experience them regularly.

  • Deviation in Settled and Original Amounts

It’s imperative to keep track of all the settled and original amounts daily for the best results. Any discrepancies and unsettled amounts can lead to problems later. By settling all pending dues regularly, you can reduce your interchange downgrade and continue to enjoy lower transaction costs.

  • Tax and Tips Aren’t Separated From the Transaction’s Total

Interchange fees depend on various factors, including parameters on how transactions are processed and settled.

Merchants must pay extra attention to how each processed transaction and the associated tax volumes can affect the interchange fee category.

For instance, failure to itemize taxes and tips separately can cause interchange downgrades, resulting in higher processing fees.

To avoid such circumstances, merchants should have a dedicated PSP to ensure sales tax and tips are recorded separately from the transaction total. Furthermore, the transaction platform should record these values separately.

What Are the Ways To Reduce the Interchange Downgrade Fee?

Interchange downgrade isn't the end of the road for merchants. With the right approach, you can ensure your transactions are processed in the regular format without incurring extra fees.

Here are some factors to consider:

1. Settle on a Batch Format [Daily/ Monthly]

Batch settlement is a crucial part of the payment processing system. Merchants who don't settle their batches risk late fees daily, which can be easily avoided with regular batch settlement. Even though 24 hours is the norm, many merchants follow a different schedule, which varies between weekly and monthly. 

Daily batch processing has its inherent benefits. Apart from saving your payments from a higher processing fee, it also allows you to tally your daily payments and helps you keep track of any pending/declined payments.

2. Don’t Skip Security

Security measures are in place to ensure your business follows the proper protocols to keep your data safe and secure. These security measures are relevant to your business's and customer's data. 

When you employ suitable security measures, you are effectively ensuring the use of appropriate tools for payment processing. For instance, by cross-checking the address with the one on record, you can verify the correct card details, thereby enhancing the security of online transactions. 

A successful transaction will always comply with the processing requirements, allowing you to seek the benefits of regular batch processing.

3. Secured Pay Techstack 

A comprehensive technical payment stack plays various roles in a business model. When an organization employs a well-rounded payment stack, it indirectly employs different technological components crucial to effectively accepting and processing payments.

Envision a payment system that caters to your current needs and has the foresight to adapt to your future requirements. A well-defined payment stack offers a streamlined and efficient solution to all your business-related payment needs, both now and in the future. 

A reliable payment stack enhances customer service, helps optimize revenue, maintains security and compliance standards, and drives operational efficiency.

How inai Helps?

Merchants can seek inai's help to reduce their interchange downgrade fee as follows:

Merchants can use historical transaction data to find the optimal time and methods for authorizing transactions successfully. This minimizes the friction in approvals and helps reduce the risk of declines and subsequent downgrades.

By automating settlement and reconciliation processes, merchants can process transactions promptly, thereby reducing the risk of delays that could lead to interchange downgrades.

inai's data-driven, actionable recommendations, based on transaction patterns, competitor benchmarks, and customer behavior, help merchants optimize time and approval methods, which align well with periods of lower risk and higher approval rates, reducing the likelihood of downgrades.


Interchange downgrades might not be the end of every merchant’s payment cycle. While many people might feel this is unavoidable, there are ways and means to ensure you are abreast of your pending payment approvals and clearances. 

With a tight vigil and top-notch technology, you can successfully reduce the costs of interchange downgrade and drastically improve your approval rate. 

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