Interchange Downgrades

A catch-all, penalty-style tier used when a transaction doesn't meet the requirements for lower "qualified" rates (e.g., missing data, late settlement, or key-entered when a chip was available).

Visa downgrade categories applied when a transaction fails to meet requirements for its intended program (such as missing AVS or settling late), causing it to fall into a more expensive "standard" bucket.

Mastercard's higher-cost fallback categories for transactions that don't meet program rules (such as Merit). Common causes include incomplete data, poor authorization/settlement matching, or delayed settlement.

A commercial or purchasing card transaction that only qualifies for the basic Level I rate because the merchant did not send enhanced B2B data (such as tax, PO number, or line-item detail), resulting in the loss of significantly cheaper Level II/III interchange.

1. Missing or Incorrect Required Data Fields

Card networks require specific data elements to qualify for lower interchange. Missing, incomplete, or inaccurate data is the single most common downgrade driver.

Examples of required data elements:

• AVS (Address Verification Service) for e-commerce or key-entered transactions
• CVV/CSC for card-not-present (CNP) transactions
• Tax amount for Level II qualification
• PO number, order number, item detail for Level III
• Customer code for corporate or purchasing cards
• Tip amount (for restaurants) properly submitted after settlement
• Enhanced data indicators (e-commerce indicators like ECI, UCAF, 3-D Secure values)

Why this triggers a downgrade: Card brands give discounted rates when merchants provide information that reduces fraud and chargeback likelihood. When the information is incomplete, the risk category increases—raising interchange.

2. Late Settlement (Batch Not Sent Within Required Window)

Most retail transactions must be settled within 24 hours of authorization.

Common downgrade triggers:

• Batch closes skipped or delayed
• Terminal clocks incorrect (time drift)
• Gateway failing to send batch file
• Manual post-auths settled days later
• Lodging/fuel merchants not using extended authorization rules correctly

Card brand rules (typical examples):

• Visa: most categories require settlement within 1 day
• Mastercard: retail transactions must be settled same day or within 24 hours; otherwise fall to Merit III or Standard
• Discover: late settlement pushes to Standard Base
• AmEx: can reclassify to Non-Qual if delayed

Late settlement is one of the easiest downgrade issues to correct.

3. Authorization and Settlement Mismatches

When the authorization does not align with the settlement data, the transaction fails qualification.

Common mismatches:

• Settlement amount higher than authorization amount (without proper incremental auths)
• Authorization expired before settlement
• Multiple authorizations submitted for the same transaction without proper linkage
• Force post without a valid auth code
• Failed partial approvals submitted incorrectly
• Using an estimated auth (e.g., hotels, gas pumps) without adjusting or re-authing properly

Why it matters: Interchange rules require an accurate "auth-to-settle" connection. Incorrect matching suggests potential fraud or processing errors, resulting in higher interchange.

4. Improper Transaction Entry Method

If a more secure method was available but not used, networks assign a higher risk category.

Common scenarios:

• Key-entered when swipe/EMV/tap was available
• Magnetic stripe used when EMV chip was present
• Manually entered card numbers (phone orders, damaged cards)
• Terminal running in fallback mode due to chip reader issues

Downgrade examples:

• Visa Retail EMV → downgraded to EIRF
• Mastercard Core → downgraded to Merit III
• Increased downgrade frequency on PIN-debit transactions handled incorrectly

Why it matters: Card networks reward secure entry methods. Manual entry is inherently higher risk.

5. Terminal, POS, or Gateway Configuration Errors

Incorrect configuration or outdated software often causes downgrades across an entire merchant portfolio.

Frequent configuration issues:

• Incorrect merchant category code (MCC)
• POS failing to populate required fields (tax, customer code)
• AVS disabled or not enabled by default
• Terminal firmware too old to properly submit EMV data
• Gateways or integrators not transmitting Level II/III data
• Missing tip adjustment workflows (restaurants)
• No settlement indicators sent by gateway

System-wide result: a misconfigured POS can downgrade every single transaction until corrected.

6. Card-Not-Present (CNP) Qualification Failures

E-commerce, MOTO, and unattended terminals require additional verification.

Common failures:

• Not submitting AVS
• Missing CVV
• Incorrect ECI indicators
• No 3-D Secure or tokenization when required for certain programs
• Gateway integrations missing ecommerce tags

Brand-specific notes:

• Visa: requires ECI 5/6 for 3-D Secure authenticated transactions
• Mastercard: requires accurate UCAF indicators and cardholder authentication data

Incorrect CNP data often results in the highest downgrade rates.

7. Missing Level II / III Data for Commercial Cards

B2B merchants receive lower interchange rates only when enhanced data is provided.

Required data (varies by brand):

• Level II: tax amount, invoice/PO number
• Level III: line-item detail, item descriptions, freight, commodity codes

Impact: Level III can lower cost by 30–150 bps. Missing data pushes transactions to Commercial Level I or Standard.