How to avoid costly credit card downgrades

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Q: I understand there are some really high penalty rates with Visa and Mastercard for not following proper procedure. How do I know if I am doing things correctly so I can avoid penalty fees?

A: Yes, you are correct, and this will lead me deeper into the topic of Interchange Plans. In the past couple of months I have had a lot to say about Interchange rates (see here and here), and the benefits of being on an interchange passthrough plan for credit card processing—especially in light of the recent changes to debit card interchange costs by the federal government.

With an interchange plan you get the benefit of seeing all Visa and Mastercard wholesale interchange rates with full transparency. There is absolutely nothing to hide, no malicious markups, and that is what helps to eliminate much of the mark ups retailers see with traditional “tiered” rates plans.

Now, to answer your question, I would like to pull back the curtain further and explain the two interchange classifications that are highly punitive to retailers for failing to follow proper Visa/Mastercard procedures. They are the EIRF (Electronic Interchange Reimbursement Fee) for Visa, and the innocuously named, but very onerous, Standard Electronic Interchange Reimbursement Fee, for both Visa and Mastercard.

Before I explain how to avoid the EIRF and Standard fees I must warn you: if you are not on an interchange plan you will not even see them listed on your statement. On tiered plans they will be tossed into a large bucket called “non-qualified” for the biggest downgrades, without explanation. What you don’t know in tiered rate plans can really hurt you.

Electronic Interchange Reimbursement Fee (Visa only)

First, let’s go over a few toxic scenarios that make good transactions downgrade to EIRF.

Not settling transactions within 48 hours: If you have a batch of transaction that were all correctly authorized, but not properly settled in time, all the sales would default to EIRF. That would take you from a 1.54% + $0.10 cents interchange to 2.30% + $0.10. Ouch!

This also becomes a problem if you authorize a sales order and then wait to ship the goods after 48 hours. If you use the same authorization number beyond the 48 hours you will default to EIRF.

Solution: Always settle your batch nightly. If you ship past 48 hours of the initial card authorization, get a new authorization number on the day you ship to avoid EIRF.

Mismatch between the authorized sale amount and the “settled” amount: If someone comes into your store, and you ring them up for $250 in merchandise and obtain an authorization, what do you think happens if they decide to leave out one item and reduce the sale to $225? If you use the same authorization number that you obtained for the $250 (even though it is a lesser amount), than the EIRF strikes again. While most merchants know it is okay to use the same authorization if it’s under the approved dollar amount, they don’t realize that it defaults to EIRF.

Solution: Get a new authorization code if the sales amount changes, even by a penny. Make it a policy…educate your employees to do this.

Not getting an Address Verification on a keyed-in transaction: You are required to obtain an address verification on all keyed-in sales (phone, web, catalog). If you do not, they will default to EIRF.

Solution: Enter all AVS (Address Verification Service) information when prompted at the point-of-sale and enter the fields correctly. Make sure your POS software or terminal is programmed to prompt for AVS on all keyed-in sales.

Authorization is obtained by voice, and then authorization is “forced”: There will be times you will need to call in for authorization and then “force,” or manually key-in, the authorization code into the POS or terminal. Just realize that when this is done, they will default to EIRF so try to limit this as much as possible.

Standard Electronic Interchange Reimbursement Fee (Visa and Mastercard)

Now that EIRF has been exposed, let me introduce you to other part of the two-headed beast of interchange, the Standard Reimbursement Interchange Fee.

Unlike the EIRF, which only applies to Visa, the Standard applies to both Visa and Mastercard. The Standard interchange is even worse than EIRF and comes in on average at around 3 percent.

The Standard is similar to the EIRF in that it is a penalty for transactions that do not meet Visa and Mastercard requirements. The Standard will be triggered for Mastercard on transactions that do not settle within 48 hours but they also rear their head most often with business cards. Business cards require certain information at the register to qualify for the lowest rate and if that info is not captured, Standard fees come into play.

Standard downgrades, assuming you are on an interchange plan and can see them, are categories such as Visa Corporate Standard or Visa Domestic Standard card-not-present, and will largely occur due to the lack of submission of required data. (Called Level I, Level II, Level III data, which I will talk about in a separate article.)

You will also see the Standard charged on Mastercard transactions for all the reasons I mentioned previously that create EIRF downgrades on Visa: timeliness, no AVS, etc.

The key is awareness of what causes these downgrades and having a plan of action to stop them. Again, you cannot remedy what you cannot see and this is another reason why interchange plans are so critical and offer the merchant insight tiered plans do not.

They allow you to see your procedural mistakes and correct them. If you are not settling batches in a timely fashion, not getting AVS on keyed-in sales, not providing the proper data for business cards, you will know it on interchange, and be able to stop it to avoid the EIRF and Standard penalty fees.

In conclusion, you can see that keeping merchants in the dark on this stuff is very profitable. Most retailers focus on just the one rate for swiped cards, and not on the cost of downgrades to EIRF and Standard. This is just another reason you should be on an interchange passthrough plan, not to mention the lower debit rates you will receive in October 2011.

If you would like to discuss the benefits on interchange pass-through in more detail, e-mail me at michael@retailmerchantservices.com.