Level 2 and Level 3 Transactions: Saving Money for Your B2B or B2G Business

Interchange fees are unavoidable. You may run into processors who claim not to charge these fees or bundle them into flat-rate pricing structures, but no matter how you slice it, you can’t avoid the cost of a card transaction

However, in some cases, merchants can reduce the interchange fees they pay. One of the major methods to do so is through Level 2 and Level 3 transactions (also referred to as Level II and Level III transactions), which can significantly reduce transaction costs for businesses. Unfortunately, not every business can take advantage of these transaction types as Level 2 and Level 3 transactions are reserved exclusively for business-to-business (B2B) and business-to-government (B2G) transactions.

Understanding Credit Card Processing Levels

Credit card processing levels refer to the different tiers of data required for credit card transactions. These levels are designed to provide varying degrees of detail about a transaction, with higher levels requiring more information. Understanding the different credit card processing levels is essential for businesses to optimize their payment processing and reduce costs. The three main credit card processing levels are Level 1, Level 2, and Level 3, each with its own set of required data fields.

Level 1 processing is the most basic, requiring minimal information such as the merchant name, transaction amount, and date. This level is typically used for consumer transactions and offers the highest interchange rates. Level 2 processing, on the other hand, requires additional data fields like tax amount, customer code, and merchant zip code, making it suitable for B2B transactions. Finally, Level 3 processing demands the most detailed information, including line-item details, shipping costs, and duty amounts, providing the lowest interchange rates and the most comprehensive data insights.

By understanding these levels, businesses can choose the appropriate processing tier for their transactions, ensuring they capture the necessary data to qualify for lower interchange rates and optimize their payment processing.

Card Types

In addition to being restricted to B2B and B2G merchants, there are only a few different types of cards that qualify for Level 2 and Level 3 transactions. Typically, these cards are issued by businesses to their employees to use for business expenses like travel, dining, costs, and supplies.  

Business card:

An individual employee is the cardholder of this type of card which makes them liable (or at least hold joint liability with the company) for the money spent. This cardholder is known as the “personal guarantor.”

Corporate card:

No personal guarantor is required with this type of card because the company is the “cardholder” that holds all the liability over the money spent. Individual employees can use the card, but they will not be held individually liable.

Purchasing card: Business to Government

Also known as a P-card, this type of card takes the place of a purchase order, which streamlines the process for authorized employees to purchase approved goods for the company. The company holds responsibility and power over the card, which means they can also cap spending and restrict purchases from businesses with certain merchant category codes.

In addition to only being used for certain purchases with certain card types, Level 2 and Level 3 data is most often used for card-not-present purchases. Card present purchases will still benefit from slightly lower interchange fees, but they aren't as noticeable as card-not-present transactions.

The biggest benefit of using Level 2 and Level 3 transactions for the business taking the card is the costs saved in interchange fees. This in turn reduces the overall cost of processing for the business. For example, if a customer uses a commercial card at your business, Visa interchange rates are 2.50% + $0.10 when it is run as a Level 2 transaction, but charges 2.70% + $0.10 when it's run as a regular transaction. That difference of 0.20% may not seem like much, but it can make a large difference for B2B merchants with high average ticket sizes.

Level 2 Credit Card Processing Data

Though Level 2 and Level 3 transactions are similar, the information required for Level 2 processing is much simpler. As such, merchants enjoy less significant interchange savings with Level 2 when compared to Level 3 transactions. In order to process a Level 2 transaction, a business must have a stand-alone credit card terminal or a gateway that is equipped to handle Level 2 transactions. For companies that process large B2B orders, equipping your business to input and process Level 2 data is definitely worth it in the long run.

The information required for Level 2 processing is probably simpler than you’re thinking. All it takes is:

• Merchant Name
• Transaction Amount
• Tax Amount (between 0.1% and 31% of the total amount)
• Transaction Date
• Customer Code or Purchase Order Number
• Merchant Zip Code

Additionally, including a sales tax indicator can further enhance the accuracy and compliance of Level 2 transactions.

In many cases, you probably already collect this information. Including it when processing the transaction can save you a considerable amount on processing fees.

Level 3 Credit Card Processing Data

Level 3 credit card data processing is used in both B2B and B2G transactions. For the most part, it is used by larger businesses as a means of monitoring spending with line-item details. Level 3 is the highest tier of processing, and it offers the lowest interchange fees. However, Level 3 processing is only supported by the Visa and Mastercard card networks.

Like Level 2 transactions, Level 3 processing requires a specific bundle of information to complete the transaction. This data further outlines transactions for both the business and the credit card companies in order to secure and maintain low interchange rates. Unlike Level 2 processing data, however, Level 3 demands a much more extensive and specific list of information.

In order to complete a Level 3 transaction, a business must collect the following:

• Ship From Zip Code
• Destination Zip Code
• Invoice Number
• Order Number
• Item Product Code
• Item Commodity Code
• Item Description
• Item Quantity
• Item Unit of Measure
• Item Extended Amount
• Freight Amount
• Duty Amount

The data collected is then reported back to Visa or Mastercard in order for the business to keep track of their spending, receive applicable sales tax details, and set restrictions on purchases made on their company credit cards. This data collection ultimately allows for businesses to ensure that their funds are being used efficiently further their operations.

Most companies will never have the opportunity to process a Level 3 transaction. However, if your business operates in a B2B-heavy industry or accepts a high number of government cards than equipping your processing system with Level 3 data acceptance can drastically reduce your interchange rates.

In fact, Level 3 interchange costs are often a full 1.00% lower than standard rates. All the work it takes to input the data required for a Level 3 transaction pays off if you’re able to gain access to the tier. Furthermore, in addition to a great amount of data, Level 3 transactions require specialized gateways to accommodate that data, so if you are looking to break into Level 3 make sure your gateway is equipped to take it on.

Benefits of Level 2 and Level 3 Processing

Level 2 and Level 3 processing offer several benefits to businesses, including lower interchange rates, access to valuable data, and improved customer experience. By providing more detailed information about transactions, businesses can reduce their processing fees and improve their bottom line. The savings from lower interchange rates can be significant, especially for businesses with high transaction volumes or large average ticket sizes.

In addition to cost savings, Level 2 and Level 3 processing provide businesses with valuable insights into their operations, customers, and markets. The detailed transaction data captured at these levels can help businesses analyze spending patterns, identify opportunities for cost reduction, and make informed decisions to enhance their overall performance. Furthermore, the enhanced data can improve customer experience by enabling more accurate billing, better tracking of orders, and streamlined purchasing processes.

Overall, the benefits of Level 2 and Level 3 processing extend beyond just financial savings, offering businesses a competitive edge through improved data insights and operational efficiency.

Card Brand Requirements

As we've mentioned, not all credit card companies offer access to Level 2 and Level 3 processing. As of 2016, only Visa, Mastercard, and American Express have the necessary programs to support the data from Level 2 transactions and only Visa and Mastercard support Level 3. Discover does not offer any programs for Level 2 or Level 3 enhanced data. If you are using American Express, all Level 2 transactions must be approved in advance, while Visa and Mastercard allow for Level 2 and Level 3 transactions through interchange without advanced notice.

Even though you do not have to notify Visa or Mastercard before processing a Level 2 or Level 3 transaction, the companies still have a list of requirements for the transaction to be processed:

Visa

All Level 2 and Level 3 transactions must be taxable to be processed by Visa. Additionally, the tax charged must be between 0.1% and 22% of the total transaction amount. In order for a Level 3 transaction to be processed, it must be charged on either a corporate or purchasing card.

Mastercard

Similar to Visa, Mastercard requires all Level 2 and Level 3 transactions to be taxable. However, Mastercard allows for the tax charged to be between 0.1% and 30% of the total transaction amount. To complete a Level 3 transaction, purchases can be made using a business, corporate, or purchasing card. In addition to this, at least one line item with the amount, description, and quantity defined must be included to complete the transaction.

How to Take Advantage of Level 3 Transactions

To take advantage of Level 3 transactions, businesses need to provide the required Level 3 data, including customer codes, billing addresses, and shipping costs. This data can be captured through a payment gateway or a standalone credit card terminal. Ensuring that your payment processing system is equipped to handle these detailed data fields is crucial for qualifying for the lower interchange rates associated with Level 3 transactions.

One effective way to ensure compliance with Level 3 requirements is to conduct a quarterly network scan. This scan helps identify any gaps in your payment processing system and ensures that all necessary data is being captured and transmitted accurately. Additionally, businesses should regularly review their payment processing setup to ensure it remains compliant with Level 3 standards.

By taking these steps, businesses can reduce their processing fees and improve their overall efficiency. Leveraging Level 3 transactions not only offers cost savings but also provides valuable data that can enhance business operations and decision-making.

Technologies Required for Level 2 Processing

To process Level 2 transactions, businesses require a payment gateway or a standalone credit card terminal that can handle the additional data fields required for Level 2 processing. These technologies enable businesses to capture and transmit the required data, including sales tax indicators, merchant zip codes, and destination zip codes. Investing in the right technologies is essential for optimizing payment processing and reducing costs.

A payment gateway is a crucial component for businesses looking to process Level 2 transactions. It acts as an intermediary between the merchant and the credit card companies, ensuring that all necessary data fields are captured and transmitted accurately. Standalone credit card terminals equipped for Level 2 processing can also be used, providing a reliable and secure way to handle transactions.

By investing in these technologies, businesses can ensure they meet the requirements for Level 2 processing, qualify for lower interchange rates, and optimize their payment processing operations.

Challenges in Level 2 Data Processing

Level 2 data processing presents several challenges, including ensuring data quality, integrating information from different sources, and ensuring data security. Businesses need to establish clear data governance policies and procedures to ensure that their data is accurate and reliable. This involves setting standards for data entry, regular audits, and continuous monitoring to maintain data integrity.

Integrating information from different sources can also be challenging, especially for businesses with complex operations. Investing in data integration tools and establishing clear data integration processes can help ensure that all necessary data is properly captured and transmitted. These tools can automate data collection and integration, reducing the risk of errors and improving efficiency.

Finally, ensuring data security is paramount in Level 2 data processing. Businesses need to implement robust security measures to protect sensitive information from unauthorized access. This includes using encryption, secure payment gateways, and regular security audits to identify and address potential vulnerabilities.

By addressing these challenges, businesses can ensure that their Level 2 data processing is accurate, reliable, and secure, enabling them to qualify for lower interchange rates and optimize their payment processing operations.

How Swipesum Facilitates Level 2 and Level 3 Credit Card Transactions Processing Discounts

Swipesum has developed a comprehensive approach to help businesses leverage Level 2 and Level 3 credit card processing discounts. The process combines advanced data analytics, custom software solutions, and expert consultation to ensure that businesses not only qualify for these discounts but also sustain them over time. Here’s how Swipesum assists businesses step-by-step:

Merchant Services Statement Audit

Swipesum begins the process with a thorough audit of the merchant's current payment processing statements using their proprietary tool, Staitment. This software analyzes payment data at an unprecedented speed and accuracy, identifying whether a business is currently achieving the possible Level 2 and Level 3 discounts. This initial step is crucial because it reveals hidden fees and the actual rates being applied to transactions, which often differ from what is promised by providers.

Data Opportunity Assessment

Using the insights gained from the Staitment audit, Swipesum identifies specific areas where data can be optimized to meet the requirements for Level 2 and Level 3 processing. This involves assessing the current data capture mechanisms and the types of transactions processed by the business.

Integration and Software Improvement

Based on the needs identified in the opportunity assessment, Swipesum either builds custom software solutions or improves existing payment processing integrations to ensure that all necessary data for Level 2 and Level 3 processing is accurately captured and transmitted. This might include enhancements to capture detailed line-item information, customer codes, and tax amounts.

Provider Liaison and Compliance

Swipesum acts as a liaison between the business and the payment processors to ensure that all parties are aligned and that the data being passed meets the stringent requirements for Level 2 and Level 3 discounts. They work with the payment processors to verify that the system's output is compliant and that the merchant is indeed qualifying for the reduced rates.

Ongoing Monitoring and Optimization

Achieving Level 2 and Level 3 rates is not a set-it-and-forget-it solution. Swipesum provides ongoing monitoring and optimization services to ensure that businesses continue to meet the requirements necessary to benefit from lower interchange rates. This continuous oversight helps businesses adapt to any changes in transaction patterns or regulatory requirements that might affect their qualification status.

Education and Training

In addition to technical and compliance support, Swipesum educates their clients on the importance of maintaining the integrity of the data captured and processed. They provide training to the business’s team on how to handle data securely and ensure compliance with all relevant standards.

By integrating these steps, Swipesum ensures that businesses not only achieve but maintain the cost-saving benefits of Level 2 and Level 3 credit card processing. This approach not only reduces payment processing costs but also enhances data security and compliance, adding a layer of financial and operational efficiency that can significantly impact the bottom line.

Although Level 2 and Level 3 processing are certainly more complex than typical transactions, the savings are worth it for businesses who provide B2B or B2G goods or services. The most important thing to keep in mind when traveling up the tiers of processing is that the higher you go the more information and specialized equipment you need to process the transactions—but the higher you go, the more you'll save.

Hoping to reduce how much you pay for credit card processing? Swipesum can help! Our technology curates processors that fit your unique business and forces them to compete. The result is better solutions at lower rates, guaranteed. Click here to get started!