Downgrade Fee

What is a Downgrade Fee?

When you enter into an agreement with a credit card processor, they’ll often advertise a low processing fee that ultimately only applies to transactions within a target interchange category. A downgrade fee is any surcharge your payment processor adds when processing transactions in a higher–and therefore more expensive–category.

• See: Interchange Categories

You can identify a downgrade fee as any fee you’re charged on top of the rate you expected, especially if the additional fee applies to only a certain percentage of your total transactions. If downgrade fees aren’t clearly labeled on your credit card processing statement, reach out to your payment processor for more information.

Although downgrade fees are most often associated with tiered pricing models, merchants on interchange plus price can encounter them, as well.

• See: Tiered Pricing
• See: Interchange Plus Pricing

Understanding Downgrade Fees

Downgrade fees often feel like hidden fees, because payment processors rarely disclose them at the time of merchant account activation and sometimes even obscure them on your credit card processing statements. While downgrade fees vary between processors, they’re typically a 1-3% surcharge on top of your expected processing rate for all non-qualifying transactions.

If you intend to accept a variety of payment methods and to process transactions through multiple channels, it’s in your best interest to address downgrade fees with your payment processor during your rate negotiations.

Downgrade Fee Example

Downgrade fees are easiest to explain using an example. Say you’re a merchant selling products both online and in stores. You set up a merchant account with a payment processor who offers you a special low processing rate.

After your first month accepting transactions, you check your credit card processing statement and notice that a percentage of your transactions faced a downgrade fee on top of the expected special low rate.

At this point, you check the fine print of your original agreement with the payment processor and learn that the special low rate only applies to swiped transactions. All card-not-present transactions processed online fell outside of the qualifying interchange category. These keyed-in transactions were downgraded to a different interchange category, and therefore faced a downgrade fee.