[Weekly Kick] What is a Downgrade?

Why is it that credit card processors *say* they charge you 1% (or some tiny amount) but in reality it ends up being a lot more than that? Well, a common strategy that processors employ is marking up downgrades. But what exactly is a downgrade? This week, Sean talks about downgrades in the FeeFighters Weekly Kick.

Video Transcript:

One of the biggest things you have to watch out for when you’re accepting credit cards are downgrades. Different types of transactions qualify for different interchange rates.

Interchange rates are the wholesale rate, that visa and Mastercard charge your processor. So for example, a debit card has a lower interchange rate than a regular credit card, and a regular credit card has a lower interchange rate than a rewards credit card.

One trick that processor is will often play on their customers is to quote you one rate, but then only apply that rate to a certain type of transaction. Then when another kind of transaction happens, for example, if you were to accept the rewards card, they’ll charge you more than the difference in the wholesale cost.

For example, if accepting a rewards card costs your credit card processor an additional point four percent, they might pass onto you an additional point eight percent. So building extra margin into these downgraded transactions.