Credit card processing costs are some of the biggest expenses businesses face. For B2B businesses charging hundreds or thousands of dollars to their clients, the processing fees can really add up.
One way that companies can lower their effective rate and keep more money is by participating in Level 2 and Level 3 processing.
Here’s a breakdown of how to lower your credit card processing fees and benefit from Level 2 and Level 3 rates.
What Credit Card Processing Fees are in a Charge?
When a company charges the card of a customer, they have to pay processing fees. These include the interchange rate plus the cost from their merchant services provider to move the funds.
Some merchant services companies charge a flat rate (for example 2.9% per transaction) while others, like Stax, charge a flat subscription rate plus the direct cost of interchange.
Because the interchange rate is variable based on card brand and card type, it can be difficult to plan for how much you’re paying each month to process credit card transactions . The fees that credit card companies decide to charge are issued to help offset the amount of money they lose from fraudulent charges.
In fact, the riskier a transaction is (or the more likely it is to result in a chargeback) the higher the interchange rate is. This is especially true for B2B and G2G companies, as cards are often linked to company bank accounts and transaction amounts can be higher than those of a general consumer.
That’s why businesses need to do everything they can to lower rates where possible, especially as they scale and process more transactions. One way is to ensure you are finding ways to reduce risk when taking a customer payment.
This is where processing levels come into play.
Level 1, Level 2, and Level 3 Credit Card Processing: What’s the Difference?
Your company’s credit card processing level is directly related to how much information you collect about a customer when you charge them. Put simply, the more information you provide with a credit card transaction, the greater the data level becomes.
By default, companies process at Level 1, which means that each transaction includes the following info:
- card number
- card expiration
- billing address
- zip code
This is more than enough for most B2C companies, although it is not uncommon for them to find themselves accepting a commercial payment on occasion.
To process at Level 2 (sometimes referred to as Level II) or Level 3 (Level III), the business must collect more information from the payer. This added information is reported back to the card issuer and helps the paying business to monitor spend on the credit card being used.
The amount of data you may be required to provide also depends on the types of cards your business accepts, how many payments you are processing, the amount you process within a given transaction, and how frequently you are taking commercial cards.
If you find yourself constantly needing to ask for more information on a regular basis for commercial cards, adding Level 2 payment processing should be strongly considered to obtain the best pricing on interchange fees. This is assuming that you’re able to take advantage of the discounts through a pass-through pricing model providing you direct access to interchange rates, such as the one offered by Stax.
Providing the additional information is further incentivized into cost savings by participating credit card companies like Mastercard and Visa through their enhanced data programs.
What Credit Cards Qualify for Level 2 vs Level 3 Processing?
Many commercial cards such as business cards, corporate cards, and purchasing cards qualify for reduced Level 2 and Level 3 rates. This is particularly helpful for cards that aren’t physically present (card-not-present), whether they are accepted by phone, online, or keyed into a virtual terminal.
The main difference in qualifying a credit card for the lower Level 3 interchange rates vs Level 2 is the amount of information provided at the time of payment. This is determined directly by the issuing credit card company. It is important to note that regardless of the card provider, personal consumer cards are only eligible for Level 1 credit card processing fees regardless of the amount of data being submitted.
These processing levels are extremely common with B2B or B2G (business to government) businesses. In fact, having access to the lower Level 2 (sometimes referred to as Level II) interchange rates is a necessity for any business that processes large volumes and accepts a lot of commercial cards.
Level 3 (Level III) is typically reserved for those who process government cards and work with government agencies.
There is an added benefit in leveling up for businesses and customers alike.
It is not uncommon for corporations to set predefined limits on spending and added restrictions. The collected information can help the paying business keep better track of the sales tax details, set up proper purchasing restrictions, and make sure that the card is being used appropriately.
Providing added insight can help your customers understand how the card is being used and reduce the risk of misuse.
Not only does it increase payment transparency, thanks to the added layer of information your business is able to reduce the risk of chargebacks or fraud.
Card Brands That Offer Enhanced Data Programs
Mastercard and Visa
Level 2 and Level 3 enhanced data programs are most beneficial for companies that charge a lot of Mastercard and Visa credit cards. This discount is available via interchange without the need to directly reach out or notify the card brands.
Discover
Discover does not offer any enhanced data programs. As they only handle Level 1 data, there is no discount on interchange rates when submitting additional information when processing a Discover card.
American Express
American Express (Amex) offers Level 2 processing, but no Level 3 enhanced data program. Unlike Visa and Mastercard, merchants wanting to qualify for Level 2 rates are required to contact Amex for approval before they accept the Level 2 data.
Level 2 Card Processing
With Level 2 processing, you can easily achieve an interchange reduction of up to .50% on commercial cards. This can turn into significant savings as you scale, especially for large business enterprises. A majority of established businesses will fall within the Level 1 and Level 2 tiers.
Level 2 Qualifications
Merchants processing over 1-6 million Visa cards annually qualify for Level 2 rates. Same with Mastercard transactions, so long as they process less than or equal to 6 million combined for Mastercard and Maestro transactions. Both card companies require the completion of the following documents:
- Annual Self Assessment Questionnaire (“SAQ”)
- Annual Attestation of Compliance (“AOC”) Form
- Quarterly network scan by an Approved Scan Vendor (“ASV”)
As long as your business meets the requirements, Visa and Mastercard will accept the enhanced Level 2 payment data. Once requirements are met, your business then needs to be prepared with the right technology gateway capable of gathering and sending the L2 data.
A majority of qualifying payments tend to come from card-not-present transactions, although it is possible to process in person. This would require the use of a standalone credit card terminal set up to process Level 2 card data.
It is important to note that employees are still able to process the payment as long as level one fields are completed. However, even if your business is enabled for Level 2 processing, if you don’t provide all the minimum required data you will be downgraded and charged the higher interchange rates.
That’s why it is very important to have the right systems in place to ensure your business does not miss out on potential discounts due to missing fields.
The simplest way is working with a dedicated merchant services or payment technology provider with automated Level 2 processing. With the right payment gateways and Level 2 enabled payment platforms, your business can easily auto-fill the correct data fields needed to comply with Level 2 and Level 3 requirements.
Level 2 Field Requirements
Recommended for: Established businesses processing large volumes per transaction or processing a high number of transactions on a monthly and/or recurring basis.
To qualify, transactions must be taxable and the tax rate must be between 0.1% and 30%.
Level 2 minimum required* transaction data depends on the card brand.
Level 2 Enhanced Data Requirements
| Mastercard Level 2 Requirements | Visa Level 2 Requirements | Amex Level 2 Requriements |
|---|---|---|
| – Tax amount – Tax indicator – Tax ID – Customer code |
– Tax indicator – Tax ID – Customer code |
– Tax amount – Customer reference number – Shipping information |
*Specific requirements by each credit card provider are subject to change.
Level 3 Card Processing
Recommended for: Large corporations processing a majority of B2B and Business-to-government (B2G) transactions.
At Level 3, you’re providing even more information to achieve a significant discount of up to 1% on the interchange. This is considered top-tier interchange pricing for both Visa and Mastercard transactions.
Level 3 Qualifications
On top of meeting all the Level 2 data requirements, B2Bs and B2Gs looking into Level 3 have an extra set of line-item details to submit.
This information is especially critical as customers working with companies able to process Level 3 card payments typically include large corporations and government entities.
For example, Visa requires companies to have between 20,000 and 1 million in eCommerce transactions. Mastercard is similar, allowing merchants to either meet Visa’s qualifications or simply have a combined 20,000 to 1 million in annual transactions between Mastercard and Maestro.
These accounts are extremely attractive to fraudsters and identity thieves -making them some of the most expensive credit cards to accept.
Level 3 Field Requirements
In addition to the tax amounts and customer codes, more data field requirements* include:
| Mastercard Level 3 Requirements | Visa Level 3 Requirements | Amex Level 3 Requriements |
|---|---|---|
| All level 1 and 2 requirements – Product code – Item quantity – Description – Unit of measure – Extended item amount – Debit or credit indicator |
All level 1 and 2 requirements – Discount amount – Shipping amount – Duty amount – Product commodity code – Product description – Quantity – Unit of measure – Unit cost – Discount per line item – Line item total |
n/a – American Express doesn’t have an enhanced data program for level 3. |
For businesses who only occasionally accept these cards and are unable to qualify for Level 3, surcharging is another viable option to consider instead.
*Specific requirements by each credit card provider are subject to change.
How to Change Your Merchant Processing Level
B2B and B2Gs are regularly charging corporate or purchasing cards, which can have a much higher interchange rate than consumer cards. But that isn’t to say that only B2Bs are able to benefit from Level 2 or Level 3 data enhancements.
Regardless of the card brand, merchants are restricted from limiting specific card types once they agree to accept them as a form of payment. With the ability to automatically send the required card data and qualify for Level 2 rates, there won’t be a need to.
Any company processing a B2B transaction can take advantage of the lower Level 2 rates as long as they have the right payment technology and credit card processing solution in place.
Work with the right B2B Credit Card Processor
Whether the customer is paying in person or through an invoice, recurring billing, and website payment, it is important to partner with a payments provider that can help you quickly qualify for lower interchange rates with Level 2 or Level 3.
Stax works with you at every step to ensure you are maximizing revenue while still taking advantage of the best interchange costs on the market. Unlike tiered pricing models, where the merchant provider is more likely to keep the difference in interchange to themselves, having direct access to wholesale interchange rates allows you to truly benefit from the increased savings.
Even better is the ability to eliminate the manual effort of adding more qualifying data when accepting payments. With the Stax Platform, you can automatically comply with level 2 data requirements. Information is retrieved at the time of purchase, automatically collecting the additional data needed to correctly identify which cards qualify for Level 2 processing.
Now established businesses can have immediate access to the best rates straight within the platform, while still maintaining PCI compliance.
FAQs about Level 2 and Level 3 Processing
Q: What is Level 2 and Level 3 processing?
Level 2 and Level 3 processing are advanced credit card processing levels that provide cost-saving benefits to businesses. These processing levels require businesses to collect more customer data during a credit card transaction, as opposed to Level 1 processing. By collecting and providing more data, businesses can achieve lower interchange rates, resulting in cost savings.
Q: What are Level 2 and Level 3 Credit Card Processing Fees?
Credit card processing fees consist of an interchange rate and cost from the merchant services provider to transfer the funds. The interchange rate is variable and depends on the card brand and its type. With Level 2 and Level 3 processing, businesses can lower their effective rate, leading to potential savings.
Q: What is the difference between Level 1, Level 2, and Level 3 Credit Card Processing?
The primary differentiating factor of these processing levels is the amount of customer information required during a card transaction. Level 1 processing deals with basic information, such as card number, expiration, billing address, and zip code. To process at Level 2 or 3, businesses must collect more information from the payer, which then translates to lower interchange fees.
Q: What type of cards qualify for Level 2 and Level 3 processing?
Generally, commercial cards such as business cards, corporate cards, and purchasing cards qualify for Level 2 and Level 3 processing rates. The difference is traced back to the level of information provided at the time of payment. However, consumer cards, regardless of the data quantity, only qualify for Level 1 processing fees.
Q: Which card brands offer Level 2 and Level 3 enhanced data programs?
Mastercard and Visa offer Level 2 and Level 3 enhanced data programs. Whereas Discover only handles Level 1 data, it offers no discounts on interchange rates. American Express provides Level 2 processing but does not offer a Level 3 enhanced data program.
Q: What are the requirements needed to qualify for Level 2 and Level 3 processing?
Level 2 processing requires businesses to meet specific qualifications set by their card brands. This generally includes processing a certain number of transactions per year, submitting certain documentation, and ensuring their technology infrastructure can handle Level 2 data. Businesses seeking Level 3 processing must meet all Level 2 data requirements and submit additional line-item details relevant to their transactions.
Q: How can businesses change their Merchant Processing Level?
Businesses can switch to Level 2 or Level 3 processing by having the right payment technology and credit card processing solution in place. The specific requirements and procedures for changing processing levels should be discussed with their payment processors or merchant service providers.
Q: How can businesses benefit from partnering with the right B2B Credit Card Processor?
Partnering with the right B2B Credit Card Processor, such as Stax, can help businesses qualify for lower interchange rates and create significant savings. Stax’s platform not only ensures the automatic compliance with level 2 data requirements but also provides direct access to wholesale interchange rates.
