As an Independent Software Vendor (ISV) or Value Added Reseller (VAR) relying on residual income from credit card processing, it’s critical to stay informed of changes made by card brands to their interchange rates and fees. These changes can have a direct impact on the residuals you earn. If a merchant’s processing rate is downgraded due to shifting qualification requirements or fee structures set forth by card brands, this can result in additional fees that negatively impact your residuals. In other words, neglecting to analyze these changes could lead to profit loss.

The major card brands, including Visa, Mastercard, Discover, and American Express, have recently made changes to card qualification rates and fees. These changes are all about making sure merchants are appropriately charged. This happens due to a combination of factors, including intensifying competition among card brands, evolving consumer behavior, and the need to safeguard card transactions from fraud and increase security. 

In this blog, we’re shining a spotlight on the changes that will have the biggest impact on our partners and merchants and showing you how to stay on top of the updates and avoid downgrading. These changes now include the introduction of new merchant category codes (MCC) for e-commerce and card-not-present (CNP) transactions, with different qualified and non-qualified rates. Initially slated for 2020, the changes were postponed due to the Covid-19 pandemic.

How to stay up-to-date

Interchange rates can frequently change, with updates happening every spring and fall, as the major card brands aim to continually optimize their fees and security measures. Staying on top of these updates will ensure you adjust processes accordingly. You can find updates from the major card brands on their respective websites. Check out their news and press release sections for the latest information on changes to their interchange rates and fees. Additionally, we’ll keep you informed and ready for any changes in the world of card payments.

Most significant changes among the card brands 

American Express has introduced an OptBlue Acquirer Assessment and a Transaction Fee of $0.165% + $0.02, effective April 22, 2022, applied to all non-debit card charges submitted under the program for all industries.

Discover, which issues cards directly to consumers and commercial entities, will continue to be paid directly through the merchant’s credit card processor for each transaction. A significant change noticed is the increase in their Commercial Electronic Prepaid Interchange rate from 2.30% + $0.10 to 2.65% + $0.15, a rise of 0.35% + $0.05. Discover has also introduced a new Charity US Consumer Interchange Program (MCC 8398) with card-present and card-not-present transactions eligible for this program with specified rates.

Visa is streamlining its processing with a new name and changes to the interchange rate for downgrade transactions. The new interchange rate will be Non-Qualified, with a rate of 3.15% + $0.10 for Consumer Credit transactions and 3.15% + $0.20 for Small Business credit transactions. This change comes with an increased Non-Qualified Consumer Credit interchange rate, rising from 2.70% + $0.10 to 3.15% + $0.10, an increase of 0.45%. This fee may be applied to retail merchants who key-enter a transaction or fail to batch out at the end of the day. To ensure the best rate, merchants must now meet new requirements, such as using additional data elements like CVV and AVS results to confirm cardholder identity and transaction authenticity. These changes are detailed in the accompanying tables.

Source: “Visa Modifications to Credit Interchange – Effective April 18, 2020” by Brittney Carlisle.

Let’s also examine how Visa’s new interchange rate on non-qualified consumer credit transactions has affected real merchant data. While these merchants had no changes from their processors on fees, their interchange rates significantly increased due to Visa’s updates.

Mastercard’s Standard interchange has increased from 2.95% + $0.10 to 3.15% + $0.10, an increase of 0.20%. This fee is typically applied when the transaction does not match basic qualifications, such as missing AVS data or failing to settle sales daily.

Meanwhile, the Enhanced Standard and World US Standard are also set to increase by the same amount. On the bright side, the High-Value Standard and World Elite Standard will see a decrease, with rates dropping from 3.25% + $0.10 to 3.15% + $0.10, a decrease of 0.10%.

To view the full summary of Fall 2022 Card Brand 7 Debit Network changes, click here.

Upcoming changes to card brand fees

• Visa: Introducing two new fees. The Estimated Authorization Fee will be 0.02%, and the Incremental Authorization Fee will be 0.02% for any approved Estimated and Incremental Authorizations. These fees will impact merchants processing Visa Credit and Debit transactions and processing estimated or incremental authorizations.
• American Express: Inbound fees on foreign-issued cards will increase, excluding JCB and foreign-issued debit cards. The AMEX OptBlue Inbound Fee will increase from 0.40% to 0.60% (a difference of 0.20%). This will impact merchants processing AMEX OptBlue transactions.

NOTE: The changes will be effective from April 17, 2023 (Visa) and April 15, 2023 (AMEX).

What is downgrading?

Downgrading occurs when a transaction is not processed at the qualified rate and is instead processed at the higher, non-qualified rate. Understanding these changes and what downgrading means is crucial for merchants to ensure they are appropriately charged for transactions. This can happen for several reasons, including insufficient information being provided during the transaction or the transaction not meeting the card brand’s security requirements. 

Reasons for downgrades

• AVS and CVV/CVC results: Transactions that fail the Address Verification Service (AVS) or Card Verification Value/Code (CVV/CVC) check may be more likely to be downgraded.
• Transaction type: Card-not-present transactions, such as those made online or over the phone, may be more likely to be downgraded as they carry a higher risk of fraud. This is because the card is not physically present during the transaction, and the cardholder’s identity cannot be verified by checking a signature or government-issued ID. Certain types of transactions, such as recurring payments or international commerce, may be downgraded due to their higher risk profile.
• Settlement status: Transactions that are not settled promptly may be more likely to be downgraded. 
• Insufficient information: If a merchant does not provide enough information during a transaction, such as a customer’s billing address, the card brand may classify the transaction as non-qualified and subject it to a higher rate.

How to prevent downgrading 

Don’t let downgrading get you down! To avoid it, merchants should ensure that their transactions are correctly processed. There are a number of best practices that merchants can follow:

• Use Address Verification System (AVS) and Card Verification Value (CVV); AVS and CVV are security measures used to verify the cardholder’s identity. By using these measures, merchants can reduce the risk of fraud and ensure that their transactions are processed at the correct rate.
• Promptly Settle transactions.
• Confirm that the Merchant Category Code (MCC) associated with the business accurately reflects the type of goods or services being sold.
• Ensure that the correct billing and shipping information is provided during the transaction.
• Adhere to card brand security requirements, such as using a secure connection and implementing proper fraud protection measures. 
• Regularly review transaction data to identify and resolve any downgraded transactions.

By following these steps, merchants can minimize the risk of downgraded transactions and ensure they are charged the correct rate.

Conclusion

In conclusion, it is imperative to stay informed on the significant modifications made by leading card issuers, which considerably impact our partners and merchants. We have briefly discussed the meaning of downgrading and different methods for downgrading prevention. As an ISV or VAR generating residual income from credit card processing, staying informed of the latest developments will ensure the health of your portfolio. Stay tuned; our next blog is your ultimate guide to success. We’ll cover how to assess your residuals, spot areas for improvement, and uncover the effects of various pricing models.

Sources:

Carlisle, Brittney. “Visa Modifications to Credit Interchange – Effective April 18, 2020.” January 20, 2020.

Carlisle, Brittney. “Visa Modifications to Interchange Notice: Effective Dates April 18, 2020, & October 17, 2020.” February 10, 2020.

Rej, Matt. “Most Common Interchange Downgrades.” October 22, 2022.

Miller, Susan. “Spring 2022 Card Brand Changes.” May 13, 2022.

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