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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PART 3: How to Avoid Errors

In welcoming the busiest season for payment processors, we’re diving into merchant applications and the steps that payment processors take to ensure that merchants can thrive and grow thanks to the countless businesses that fuel the ever-changing payment processing system.

To process payments, it is common for merchants (businesses) to go through their POS/software provider (ISV/VAR) to be onboarded with a payments processor, such as BOLD Integrated Payments. While processors work diligently to mitigate the seemingly miniscule errors that can potentially lead to disastrous circumstances for merchants, it is mindful to note that errors are never 100% avoidable.

To limit the probability of said errors, BOLD offers all partners access to a dedicated Partner Relationship Management (PRM) team. The seamlessness of the onboarding process can determine the ease of future merchant account adjustments, such as bank account, pricing, or DBA changes – three of which are amongst the most requested merchant account adjustments.

The better part of this article details information stemming from BOLD Integrated Payment’s Partner Relationship Manager Crystal Deese’ extensive expertise on the topic of merchant applications. As a veteran in the payment processing industry, the 7 years of experience that Crystal has under her belt provides us with the answers that many ISO agents, partners, and even merchants can find tremendously useful.

The goal of this article is to:

•  Discuss the 4 most common merchant application errors,
• Identify the ramifications of said merchant application errors,
• Understand how the processor and their partners can work together in effort to avoid these errors as much as possible, in turn ensuring a seamlessly flexible processing platform for our merchants.

PART I: The Four Most Common Application Errors.

Pricing Errors
Pricing errors mean having to call the merchant to request a signature on a Change Request Form (CRF) to correct the pricing as well as provide a copy of their Driver’s License.

Inaccurate Corporate/Legal Name – TIN Mismatch
Providing inaccurate Business Legal Name and Fed Tax ID combos causes a TIN Mismatch or can Pend the application in Underwriting.

Invalid Banking Information
When Invalid Banking Information is keyed into an application, it causes an ACH Reject to occur.

Owner address matching the DBA address and Owner Nicknames
The Owner address cannot be the same as the DBA Address as it must be the physical address of the Owner. Owner names must be full legal names, no nicknames.

PART II: Ramifications of the Errors.  

Pricing Errors
Pricing Errors cause negative residual income for the Partner or an overcharge to the Merchant. Pricing cannot be changed without a merchant signature on a CRF. The merchant will also have to be back billed on a future statement, or the Partner will have to potentially take a loss for the period the pricing was incorrect. Pricing changes are only approved on the first day of each month, so it is essential that pricing changes are submitted no later than the last day of the month. If the cutoff is missed, partners and merchants will have to wait an additional month, which typically leads to the accumulation of negative residuals and back billing.

Inaccurate Corporate/Legal Business Name
If the Merchant has a TIN Mismatch, they have 90 days to correct their information.  The Merchant will incur a $49/month fee until the TIN Mismatch is corrected. At the end of the 90 days, if the Merchant has not made the necessary corrections, the Risk Department will withhold 25% of their deposits for backup withholding for the IRS. 

Invalid Banking Information
When the Processor receives an ACH Reject, they place a 100% hold on the Merchants funds. To remedy this error, a bank change case must be submitted along with a CRF that is completed by the partner and signed by the merchant. The SLA time for a bank change is 6-7 business days, which can delay funding to the merchant, in turn causing strain on business operations. Additionally, this typically leads to an ACH reject fee of $30 each time a deposit attempt is rejected.

Boarding Owners by Nicknames in Lieu of Full Legal Names
Owners of merchant accounts must be boarded under their full legal names listed on the legal ID or driver’s license. Boarding a merchant with an owner’s nickname results in extension on account pending status.

PART III: How to Avoid Such Ramifications.

Pricing Errors
Merchant pricing is more of a strategic process than an everyday price-tag implementation. It is important for our Partners to work with our PRM team for statement/profit analysis and review, which can be conducted in the form of virtual conference calls.

Inaccurate Corporate/Legal Business Name
Anytime Crystal is completing an application with a Merchant, it becomes her mission to seek out even the most miniscule of errors. Typically, it is very telling that an error has been made if the DBA name matches the legal name. Unless a business is a Sole Proprietorship, the legal name should never exactly match the DBA name. The legal name should always be followed by an LLC or Inc.

Productive research can be conducted on each merchant per the Secretary of State (SOS) website. Amongst the extensive research that she conducts daily, Crystal also verifies the legal name, legal address, and ownership of each merchant. Additionally, she Googles the merchant’s business to verify the business address, the business website to gain insight on their products/services offered, and satellite images reflecting the storefront of the specified address.

While formulating applications, it is imperative that the agent/partner asks the merchant to verify small yet sensitive details such as the EIN, SSN, DOB, Bank Account Number, Routing Number, etc. at least twice in attempt to decrease the margin of error.

Invalid Banking Information
The most reliable method of verifying a merchant bank account is to obtain a voided check. Although voided checks are no longer required to proceed with Click to Agrees, they are still an extra form of verification for the banking information that implements security for both the processor and the merchant. Asking for the voided check or bank letter to verify the banking information upfront can reduce or eliminate the possibility of an account going live with the wrong bank account on file. In the case that it is impossible to obtain a voided check or bank letter, one should implement checks and balances by having the merchant verify the sensitive data twice.

Boarding Owners by Nicknames in Lieu of Full Legal Names
As previously mentioned, the Secretary of State website is amongst the most reliable sources for DBA/corporate name/ownership verification. It is common practice to ask for a copy of the owner’s driver’s license at the time of the application. If you cannot obtain a copy of the merchant’s driver’s license, be sure to verify names that are commonly known to be nicknames, i.e. Jim or Jimmy (James) , Mike (Michael), Pat (Patricia), etc.

 Conclusion

In any given industry, many errors are preventable through the practice of proactivity. Per Crystal’s extensive explanation of merchant application errors, we learn the true value of attention to detail for both the payment processor and the partner. All parties involved are susceptible to the negative effects of the ramifications that can easily be avoided should the processor and their partners provide their due diligence applying the aforementioned points to every last merchant application process.

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