How to Audit a Merchant Statement for Hidden Downgrade Fees, Nonqualified Surcharges, and PCI Charges

Your confusion regarding your payment processor statement is justified.

Most statements are constructed to confuse users and hide the flow of money out of businesses. Your merchant statement contains many fees that may appear to be standard: discount rate, transaction fees, monthly service fees, etc. However, your statement may also contain downgrade fees, non-qualified surcharges, and PCI fees. These do not show up on the main fees and slowly eat away at your profit margins.

Most businesses understate the impact of the fees on their bottom line; instead, they focus on the lost revenue, not the underlying issue of the non-transparency of the fees.

The great news is that you do not need to be a payment professional to audit your statement. Any approach will work and you will be able to identify most of the dead money.

This will be a guide to identify and understand your processor statement regarding downgrade fees, surcharges, and PCI fees, what these fees are normally, how to identify them on your statement, and your options if you find them.

Reading Merchant Statements

Merchant processing statements can be hard to read because of the jargon, scattered formatting, and the use of bundled fees. Some merchants clearly state their fees while others bury them in different sections and use terms that are unfamiliar to most business owners.

These statements could include:

• Fees for interchange
• Assessments
• Processor markup
• Minimum monthly fees
• Batch fees
• PCI compliance fees
• Non-qualified transaction fees
• Fees related to retrievals or chargebacks
• Administrative fees that are assessed on an annual or quarterly basis

While the challenges of fees are sometimes justified (or unreasonable), not every fee is unjustified, and this is the tradeoff of accepting credit or debit cards. The real questions that need answers are if the fees are justified (or transparent) and if it was avoidable. An audit is one way to determine if you are paying for an inflated/unjustified fee or if it is the standard charge.

Your Preparations for the Audit

There are several items that you will need to complete the audit. This will allow you to compare the expectations and assurances to the actual costs incurred.

These documents include

• Previous 3 to 6 (or more) processing statements
• The initial processing agreement
• Any compliance documentation
• Rate and price documentation
• Notes from any sales calls, and promises made via email related to the rate and monthly fee

When performing an audit, primarily looking at one statement could lead to a significant amount of undetected risk; fees can and will vary from month to month and sometimes a charge will be assessed in a given month and then not billed again until the quarter or annual timeframe. Several statements will provide the most accurate and comprehensive perspective on any established inequitable pattern or surprise.

Step 1: Learn the Account Pricing Model First

To locate unexplained fees, first understand how your account is priced. Most merchant accounts are priced using one of three models:

Tiered Pricing

In this pricing model, the card processing fees are classified into three categories, namely qualified, mid-qualified, and non-qualified. Because there is a lot of room for interpretation in how card processing fees are classified, most hidden fees and downgrade fees are found in this tier.

Interchange-Plus Pricing

In this pricing model, the direct fees charged by the card networks and the processor’s markup are separated. Most of the time, this pricing model is more straightforward than the rest since the interchange and assessments are separate from the markup.

Flat-Rate Pricing

In this pricing model, every transaction is charged a fixed rate as well as a simplified monthly rate. Although this model is more straightforward, there are still a lot of unexplained extra fees, such as compliance-related fees or PCI.

If your account pricing uses tiered descriptions such as qualified or nonqualified, pricing models are likely to be tiered. The significance is that tiered pricing increases the likelihood of hidden fees and unexplained downgrades.

Step 2: Identify Downgrade Fees and Rate Reclassifications

A downgrade occurs when the most favorable transaction price does not apply to a transaction and the transaction is instead placed into a more costly pricing tier. While this can happen for valid reasons, it occurs more frequently than the average merchant expects.

Some common triggers that lead to downgrades include:

• Reviewing card payments instead of swiping or dipping the card
• Failing to complete the transaction
• Missing address details for card-not-present sales
• Accepting business or rewards cards
• Using misplaced or outdated equipment or settings
• Missing transaction data for commercial card processing

On your merchant discount statements, you may see downgrade-related costs with names like:

• Mid-qualified surcharge
• Non-qualified surcharge
• EIRF downgrade
• Standard downgrade
• Settlement adjustment
• Settlement adjustment
• Excess qualification adjustment

If your processor sold you a low “qualified” rate, but a large percentage of your transactions are showing as mid-qualified or non-qualified, that headline rate may be meaningless.

How to Audit Downgrades

The first thing you should do is check:

The percentage of volume in each tier

The effective rate, which is calculated as total processing fees divided by total sales volume, should be equal to the effective rate

Effective rate

Look for repetition, as card-present transactions that are regularly downgraded suggest that your set up, timing, or pricing is suboptimal

Recurring patterns

Fee names that are too vague are a cause for concern. If you see vague terms like “adjustment” or “surcharge”, you should request their full breakdown

Vague fee labels

An effective audit is not just about identifying a fee, but identifying the cause of the fee and whether it could have been prevented.

Step 3: Review Nonqualified Surcharges

Nonqualified surcharges are most frequently seen in tiered pricing structures. These fees occur when a transaction is processed in the most expensive category instead of the qualified one you were shown.

This is one of the many ways merchants lose money and may not be aware of it.

While a processor may seem attractive and offer a low rate, only the most basic debit and consumer cards qualify. All premium and rewards cards, manually entered cards, corporate cards, and certain online transactions are placed into the nonqualified bucket.

Indicators You Are Likely Paying High Nonqualified Fees

Look for the following warning signs:

• A significant portion of your sales volume is classified as non-qualified
• There is no clear explanation for the non-qualified status on your statement
• The non-qualified rate is much higher than the stated base rate
• Your business model is likely to cause downgrades, but the sales rep did not mention it
• The statement appears to group non-qualified fees into a category that is hard to verify

A business may think it is paying 1.79% because that is the rate quoted in the sales pitch. However, when nonqualified surcharges are factored in, the effective rate is likely to be at least 3.25% or higher.

Questions to Pose to Your Processor

If you see significant nonqualified charges, inquire about:

• What specific types of transactions are being sent to non-qualified pricing?
• How many transactions have been downgraded, and what are the reasons?
• Can you share an interchange-level breakdown?
• Is interchange-plus pricing an option instead of tiered pricing?
• Are there any terminal or gateway configurations that are causing unnecessary downgrades?

These types of questions change the focus from vague rate marketing to specific fee accountability.

Step 4: Checking PCI Fees, Compliance Fees, and Security Fees

PCI charges are often presented as mandatory charges, and while that may be the case, it is often the case that the billing methodology varies from one provider to the next.

PCI DSS is an acronym that describes the security standards that the cardholder data handling process has to meet. While compliance is an ongoing process, it is the case that processors place a charge related to compliance that is ambiguous, excessive, or they have charged you for the same thing multiple times.

Typical line items related to the PCI charges include but are not limited to:

• PCI compliance fee
• PCI noncompliance fee
• PCI annual fee
• Security fee
• Data breach protection fee
• Compliance program fee
• Vulnerability scanning fee

Some of these charges may be legitimate depending on the services and contract you have. However, others may be overinflated. Additionally, compliances that the merchants have already completed may have been charged for these.

Auditing the PCI charges

The following should be verified:

• Determine whether the fee was disclosed as part of your contract. If an item is on your statement and not part of your pricing agreement, it should be flagged.
• Immediate reviews should be conducted based on whether you are charged for a compliance fee and a noncompliance fee at the same time.
• Some fees may be charged, and you may be unable to notice them due to the infrequent nature of their appearance, regardless of whether the fee is a monthly, quarterly, or annual charge.
• Consider whether the fee is associated with any actual service. In the case of scanning, breach protection, or compliance tools, if you pay for them, ask what is included.
• If you have completed the PCI questionnaire or validation, ask why a noncompliance fee is still being assessed.

While a PCI fee is not automatically suspicious, it should never be vague. You should have a clear understanding of its purpose, the frequency with which it is charged, and whether it is possible for the charge to be reduced or eliminated.

Step 5: Calculate Your Effective Rate

Effective rate calculation is a clearly defined process.

There is a formula to achieve this:

You will achieve an effective rate of

If you have card sales that amount to \50000 and you already paid a total of \1650 in fees.

It is possible to achieve a straightforward result that is not influenced by the advertised rates on your contract. You will be charged hidden surcharges, and monthly fees multiplied by the rate you originally quoted. Your effective rate may be significantly greater as a result.

An effective rate should help to provide clarity and understanding during an audit, especially if conducted over a number of months to highlight any seasonal variations.

Step 6: Watch for Other Fees That Mask the Real Cost

There are several other areas you will find problems beyond downgrade fees, non-qualified surcharges, and PCI fees. Your fees can be further increased by the smaller routine fees found on many statements.

These can be:

• Monthly Statement Fees
• Gateway Access Fees
• Batch Fees
• AVS Fees
• IRS reporting fees
• Annual Membership Fees
• Customer Service Fees
• PCI Portal Fees
• Compliance Assist Fees
• Minimum Processing Fees

These items will potentially increase the cost of your account. That is why a full audit of your account is critical so that every line item is checked and not just the percentage-related charges.

Step 7: Compare Your Statement to Your Contract

After fee identification, the next step is to compare the fees to your merchant agreement.

In particular, look for:

• Transaction rates that were pledged
• Monthly account fees
• PCI fees
• Language regarding early term fees
• Equipment leases
• Annual fees
• Pricing tiers

Finding and documenting rates that do not match what is stated and fees that are not disclosed can be valuable. You should not discard statement pages, sections of your agreement, and sales emails that support your claim.

This can be helpful if you plan to dispute fees, renegotiate rates, or switch providers.

Step 8: Know When to Push Back

Do not consider unexplained downgrade fees, excessive nonqualified surcharges, or unexplained PCI fees to be fixed or unavoidable after your audit.

You can usually push back by

• Requesting a written explanation of a fee.
• Asking for reversals of surcharges, or credits for erroneous bills.
• Asking to negotiate a change to interchangeable plus pricing.
• Reviewing your terminal, gateway, and settlement procedures to address avoidable downgrades.
• Asking what PCI has to do with their fees and request clarifications, they may be unsupported.
• Using competing offers as leverage from your statements.

You can better charge processors with specific line item requests and question their reasoning.

Best Practices for Merchant Statement Reviews

A single audit is less useful compared to multiple ones. Pricing on merchant accounts can change at any moment, and new fees can go unannounced.

To stay ahead of any fees

• Review your statements monthly
• Re-evaluate your effective rate quarterly
• Keep records for all contracts and amendments
• Record all new fees
• Analyze your pricing structure once a year
• In an even greater measure, inquire about hidden fees immediately.

A rapid review of statements is better for preventing a backlog of costly problems.

Conclusion

Merchant statements are not just for accounting; they serve to protect your profits.

Merchant statements are dense, technical, and easy to ignore, and hidden downgrade fees, non-qualified surcharges, and PCI fees are often overlooked. However, once you know what to look for, spotting these charges becomes easier. Knowing your pricing model, how your transactions are classified, reviewing PCI billing, and determining your effective rate over several months are all important.

You shouldn’t attempt to eliminate every fee but instead focus on ensuring your costs are understandable, correct, and consistent with the agreement you signed. Understanding your pricing statements allows you to challenge pricing practices, negotiate terms in your favor, and retain more of your revenue.

Frequently Asked Questions