What typically causes "downgrades" in interchange transactions?

In interchange transactions, downgrades typically occur when transactions do not meet specified criteria set by card networks. Each card network has specific requirements for transactions to qualify for lower interchange rates, such as the presence of certain data elements or transaction types. When a transaction fails to meet these criteria, it is considered a downgrade, resulting in higher fees for the merchant.

For instance, if a merchant does not capture required data, such as a customer’s address for card-not-present transactions, the transaction may be subject to a higher interchange fee. Similarly, if a purchase is made with a rewards card and does not follow the guidelines for a lower-fee category, it too may be downgraded. This highlights the importance for merchants to understand and adhere to the criteria outlined by card networks to minimize costs associated with interchange fees.