How Can Level 2 & Level 3 Credit Card Processing Help Your Small Business?

If you’re looking for additional ways to save your business money and protect your business from fraud, you may have stumbled upon the term “level 2 processing” in your search. But what is level 2 or level 3 data? Most importantly, how much money can level 2 vs level 3 processing save you? Is it worth the effort?

If you’re interested in lowering your business’s credit card processing fees, or simply wanting to understand level 2 processing and level 3 processing, explore these topics below.

What is Level 2 Processing?

All businesses accepting credit card payments fall into a certain level of data processing. Most business-to-customer (B2C) fall into the first level of credit card processing, but most business-to-business (B2B) payments require the second or third level of credit card processing.

The higher the processing level, the more data is required. By capturing more data from each transaction, your business can take advantage of lower interchange rates. In this way, Level 2 processing can help businesses reduce their processing costs while simultaneously providing additional reporting data to their clients.

What is Level 3 Processing?

In a nutshell, Level 3 credit card processing allows B2B and business-to-government (B2G) transactions to lower credit card processing fees in exchange for additional data about the transaction. However, in reality, there’s a lot more to it than that.

Level 3 processing’s associated savings stem from interchange rates. Interchange rates are the portion of your monthly credit card processing fees charged directly by the card-issuing bank. To quickly explain: Your customer’s card connects to a bank. That bank charges you, the merchant accepting that card, a set rate for the transaction. This rate is anywhere from 0.05 percent + $0.22 to 3.50 percent and $0.10 for the transaction, depending on the type of card and transaction.

Your customer’s card may fall under several different categories, but if you’re B2B or B2G, your customers will most often use corporate and/or government cards to pay for goods. Additionally, your business may support B2B payment processing. These types of payments are eligible for Level 2 and Level 3 credit card processing interchange rates.

Level 2 vs Level 3 Card Data

There are three levels of data that may apply to any eligible transaction. Each level has a set of requirements a transaction needs to meet to qualify. The higher the level, the more details required. The lower the level, the greater the cost and risk.

It’s important to note only Visa, MasterCard, and American Express have higher-level interchange options. Also, American Express only goes to Level 2 processing. The qualification requirements vary by card type.

Level 1 processing is the default and most basic level. If you aren’t going out of your way to add data to a transaction, this is the option you’re most likely qualifying for already. (Note: Cards eligible for Level 2 and Level 3 qualify as Level 1 by default.)

Level 2 and 3 Processing Rates

To help you get an idea of the savings, below reviews Level 3 credit card processing rates in detail. It does so with the most common card type: Visa. As a reminder, your credit card processing rates are negotiated with your payment processor. For reference, they can be found in your merchant agreement.

Visa Commercial (Business and/or Company) Card Interchange Rates:

• Level 3 processing: 1.90 percent + $0.10
• Level 2 processing: 2.50 percent + $0.10
• Card Present transactions: 2.50 percent + $0.10
• Card-Not-Present (CNP) transactions: 2.70 percent + $0.10
• Standard Interchange Reimbursement Fee: 2.95 percent + $0.10

Level 1 processing costs 1.05 percent more than Level 3 processing. This means on a large commercial transaction, let’s say $10,000, you’d save up to $105 in fees on that transaction alone. Over the course of the month, your savings could be in the thousands.

Visa Business (Small Business) Card Interchange Rate:

• Level 2 processing: 2.05 percent + $0.10
• B2B transaction: 2.10 percent + $0.10
• Retail transaction: 2.20 percent + $0.10
• CNP transaction: 2.25 percent + $0.10
• Standard Interchange Reimbursement Fee: 2.95 percent + $0.20

Accepting a small business card has a smaller gap between the highest and lowest rates, as well as no Level 3 processing, but you’ll still save significant amounts of money over time. Truly, why throw away any percentage of revenue that you don’t have to?

List of Requirements for Level 1, 2, and 3 Data

Processing requirements build on each other as the levels increase. To understand Level 3 processing requirements, we must first look at Level 1 and Level 2 processing requirements.

Level 1 processing requirements

• Merchant name
• Billing zip code
• Purchase amount
• Purchase date

Level 2 processing requirements

• Everything from Level 1
• Sales tax indicator and amount
• Merchant tax idenification number (TIN)
• Merchant zip code (optional)
• Invoice number
• Order number
• Customer code, appliciable to only government/purchasing cards

Level 3 processing requirements

• Everything from Level 1 and Level 2 processing
• Product/SKU description
• Product code
• Unit price and unit of measure
• Unit quantity
• Discounts applied and line item total
• Debit/credit indicator
• Freight and/or shipping cost
• Duty and/or import taxes assessed
• VAT tax and tax rates (optional)
• Destination zip code (optional)

Understanding Data Policies for Level 2 vs Level 3

Each credit card issuer, such as MasterCard, Visa, Discover, and American Express, has its own determined set of data requirements applied to card transactions. Also, these card companies may offer different interchange fees depending on the associated credit card data processing level. Some issuers may require the business to request reauthorization in order to be eligible for Level 2 processing or Level 3 processing. To explore these differences deeper, below dives into the top-tier credit card issuers in the United States.

MasterCard

With MasterCard, businesses qualify for Level 2 processing when they process more than one million, but less than or equal to six million, of total combined MasterCard and Maestro transactions annually. (Maestro is a brand of debit cards owned by MasterCard.) This system includes every payment falling under the MasterCard umbrella.

MasterCard also accepts merchants who qualify for Visa’s Level 2 processing. To verify, MasterCard requires annual completion of three forms:

• Annual Self-Assement
• Onsite Assessment at Merchant Discretion
• Quarterly Network Scan by an ASV2

For their Level 3 processing, MasterCard requires businesses to have between $20,000 and one million combined MasterCard and Maestro transactions annually. As with Level 2 processing, merchants meeting the Level 3 processing criteria for Visa qualify for Level 3 processing with Mastercard. The same forms required as proof of Visa Level 2 processing status are required for Level 3 processing.

MasterCard accepts Level 1, Level 2, and Level 3 credit card data without a prior approval process, as long as the business meets the level criteria.

Visa

With Visa, the qualification for Level 2 processing is processing one to six million Visa transactions annually. For verification, Visa requires businesses to complete the following forms:

• Annual Self-Assessment Questionaire (SAQ)
• Annual Attestation of Compliance (AOC)
• Quarterly Network Scan by an Approved Scan Vendor (ASV)

Qualifying for Visa’s Level 3 processing requires a business completes $20,000 to one million eCommerce transactions with Visa on an annual basis. The forms listed above are also required to verify a business’s qualification for Level 3 processing.

Like MasterCard, Visa accepts Level 1, Level 2, and Level 3 credit card data without prior approval if the business meets the level’s requirements. 

Discover

Discover defines businesses qualifying for Level 2 processing to be those processing one to six million Discover transactions annually. Unfortunately, Discover only manages Level 1 data. Therefore Discover does not offer any discounted interchange rates for Level 2 data. Additionally, the credit card company neither offers nor defines Level 3 data.

American Express

For Level 2 processing, American Express instructs businesses to seek pre-approval. The application process requires that a business submit “Level 2 Merchant’s Validation Documentation.” This documentation must include summaries of the Quarterly Network Scan and a completed PCI Self-Assessment Questionaire.

Following approval, American Express accepts Level 1 and Level 2 data. American Express does not offer Level 3 credit card processing.

How to Qualify for Level 2 and Level 3 Credit Card Processing

Processing requirements build on each other as the levels increase. To understand Level 3 processing requirements, first look at Level 1 and Level 2 processing requirements. Qualifying for Level 3 processing can be a cumbersome endeavor. But once set up, Level 3 processing can save you a significant portion of your interchange fees.

As mentioned, commercial and government cards are eligible to receive Level 2 or Level 3 interchange rates, but you’ll need a few things.

Back-End setup

To move beyond Level 1 processing, you need a proper back-end setup. Your credit card processor should be able to work through this with you. The back-end setup includes ensuring your physical equipment and payment gateway is capable of asking for and accepting the necessary information, as well as ensuring the processor is set up to pass that information to the bank. Not all credit card processors are capable of transmitting Level 3 data, even if they can set up the physical device to ask for it, so be sure to confirm.

Front-End training

Once the back-end is set up, you need to train your staff on the best practices for entering the additional data. You want to ensure they understand why the additional data entry is necessary and worth their time to complete.

Unfortunately, your point of sale (POS) system likely cannot tell the difference between a skipped, ignored, or incomplete prompt because that data isn’t applicable. For example, sales tax may not have been charged on a transaction because that specific customer was tax-exempt. In these cases, it’s best to enter “0” instead of skipping the prompt entirely. This is to ensure the POS system knows the skip was intentional and the prompt was not ignored.

As mentioned, qualifications for higher-level data processing vary based on the company. The easiest way to ensure you’re qualifying for the best possible rate is to meet the highest standard of data on every transaction.

Are Transactions Secure When Using Level 2 or Level 3 Data?

You likely already know that business and commercial cards cost more than consumer credit and debit cards. But what you may not know is why.

Corporate cards usually have several levels of hierarchy behind them. A purchase made by someone at a company is more likely to be disputed due to a lack of approval. This approval must come from the cardholder, who may not be the one making the purchase in the case that they sent their assistant.

In regards to corporate cards, there’s also a higher chance that someone may not recognize the transaction made at your business (as they may be someone other than the person who made the purchase) and dispute it as fraudulent. This is why these cards are more expensive to accept. With additional data in each transaction, you’re reducing the risk of the transaction, thus reducing the payment processing fees.

Level 1 processing is the default. It doesn’t require businesses to provide additional processing data. Meanwhile, Level 2 processing and Level 3 processing require much more information. Because Level 2 and Level 3 collect more data, they’re more secure for you, as the business owner, than Level 1 processing.

All in all, higher credit card processing levels help businesses to reduce the risk of fraud or chargebacks while offering lower interchange rates.

How Merchants Benefit from Level 2 and 3 Processing

In terms of credit card processing, both Level 2 processing and Level 3 processing largely benefit merchants by offering lower interchange rates. Level 2 data processing is of great value to B2B organizations processing a high number of transactions annually. Level 3 processing is the right choice for you if you are a B2B or B2G organization accepting corporate and business cards from your customers. Whether credit card companies offer large or small discounts on interchange fees, those discounts add up. And lower interchange rates mean more money going back into your business.

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