Why Level 3 Processing is a Cost Savings Game-Changer for B2B Payments

The lower interchange rate of processing level 3 credit card transactions can often mean major cost savings for businesses. Sadly, many businesses are either not aware of the benefits that come along with level 3 processing or their payment gateway does not support the process. In this article, we will dive into:

• The difference between level 1, 2 and 3 processing
• The benefits it offers your business
• Potential pitfalls to watch out for

What Is Level 1, 2 and 3 Processing?

It may be helpful to think of credit card processing in tiers, with each level providing more information than the one before it.

• Level 1 Processing: Level 1 processing is the most basic and common form of credit card processing. It also is the highest interchange rate from the credit card companies. It’s the standard for most consumer transactions, such as a typical retail purchase you might make in a store or online. Level 1 requires minimal data which does carry an increased risk for potential fraud. Level 1 transaction detail requirements include:
  • Credit card number
  • Expiration date
  • Transaction amount
  • Merchant name
  • CVV
•  Level 2 Processing: This level adds more data points to the transaction, providing an additional layer of transparency and security. In addition to all the Level 1 data, a Level 2 transaction must include details:
  • Sales tax amount
  • Customer reference number or purchase order number
  • Merchant ZIP code
• Level 3 Processing: The highest level of data detail, Level 3 transactions are typically used for large business-to-business (B2B) and business-to-government (B2G) purchases. They include all of the Level 1 and 2 data, plus a detailed, line-item breakdown of the transaction. This includes:
  • Item descriptions and product codes
  • Quantities and unit prices
  • Freight and shipping costs
  • Discount amounts
  • Invoice number

Here is a brief summary of the main differences in levels of credit card processing:

Why Is This Important?

The driver behind Level 2 and 3 processing is the risk of the transaction. Commercial and government transactions often involve high dollar amounts and are more susceptible to fraud and chargebacks. By providing a more detailed dataset, the transaction becomes more secure. The card networks (like Visa and Mastercard) recognize this reduced risk and, in turn, offer merchants a significant financial incentive: lower interchange fees.

The Benefits: A Win-Win for Everyone

For applicable merchants, embracing Level 2 and 3 processing offers a variety of advantages:

• Lower Interchange Fees: This is the most impactful benefit. The savings can be substantial when utilizing level 3 data, often reducing the per-transaction cost by 0.50% to over 1% compared to standard Level 1 rates. For businesses with high transaction volumes or large average ticket sizes, these savings add up to a significant impact on the bottom line.
• Enhanced Reporting and Reconciliation: The detailed data from Level 3 processing is a goldmine for accounting. It allows for automated reconciliation, making it easier to match invoices, track expenses, and manage financial records. This streamlines back-office operations and reduces manual labor.
• Improved Security and Reduced Fraud: The extra data provides an additional layer of verification. It’s much harder for a fraudster to successfully process a transaction when they need to provide a valid invoice number, customer code, and a detailed list of items. This can lead to fewer chargebacks and disputes.

Potential Pitfalls

While the benefits are clear, there are challenges to address from a processor’s perspective:

• Data Accuracy is Critical: The system is designed to reward complete and accurate data. If a merchant’s system fails to send a required field or sends incorrect information, the transaction will be “downgraded” to a higher-cost Level 1 rate. Merchants must have the right technology and training to accurately capture and submit the necessary data to qualify for the lowest rates.
• Integration Complexity: Implementing Level 2 and 3 processing requires a robust payment gateway or platform that can handle the additional data fields. A standard POS terminal or e-commerce cart may not have the capability out of the box.
• Eligibility Constraints: Not all transactions or cards qualify for Level 2 or 3 processing. Consumer cards and debit cards are typically not eligible. These tiers are intended for commercial and government cards only, limiting the qualifying purchases.

Beyond just the financial benefits, Level 2 and 3 processing improves reporting, simplifies reconciliation, and enhances security, making it a powerful tool for businesses handling high-value transactions. If you want to learn how to take advantage of Level 2 and 3 processing, contact us today!