Thursday, June 7, 2012

Credit Card Processing Companies Downgrades

Credit Card Processing Companies DowngradesAn important issue to understand when examining the merchant account agreement you receive from credit card processing companies is that it rarely involves a single transaction rate. In many of these pricing agreements you will find downgrade provisions, which cover transactions that are processed at a less favorable interchange fees for one reason or other. Much like the headline contracted rate, downgrades are based on the interchange rates published by Visa and MasterCard bi-annually. However, as downgrades are typically not reported in relation to the actual interchange, it is often very difficult to determine the exact reason these transactions were downgraded to begin with.

In many instances, retailers find that the number of downgraded transactions is greater than those falling under the lower, headline rate. While most credit card processing companies will report these downgrades in the monthly statements, they are often described in terms that often unique to the processor and unintelligible to most anyone else, with little indication as to the reason for the downgrade. Downgrades are typically reported as "Non-qualified" and "Mid-qualified."

According to the Visa's and MasterCard's publicly available interchange fee documentation, when a retailer issues a refund, the interchange fee it paid to the card issuer is most often reversed. To put it simply, the card issuers pay the credit card processing companies back. In reality, you only need to review the published interchange fee tables on Visa's and MasterCard's websites to get a better idea of what interchange they must be receiving as a result of the refund.

Despite the Associations' rules, retailers do not always receive the reversed fees. This typically happens because these retailers agree to a bundled discount rate as opposed to an interchange-plus based one.

So where did this refunded fee go? The card issuer returned the interchange to the credit card processing companies, which, at least in this case, did not forward it on to the retailer. It instead kept it as an additional fee. This kind of charge is often considered as a hidden fee. While this may be the case from a visibility point of view, you need to keep in mind that in most cases the retailer agreed to this type of rate when it accepted a discount rate based on gross sales. This practice does not run against the Associations' regulations, although it certainly falls into a gray area. Of course, this part of the discount billing affects only retailers with substantial refund levels or high average transaction amounts.

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