What Is Level 2 and Level 3 Credit Card Processing?

As a business you’re constantly on the lookout for ways to reduce your operating costs. It’s only natural — it’s how you’re able to reinvest those savings to drive customer value and remain competitive. Ideally, you’ll also want to take measures to reduce fraud and privacy breaches, given the rising levels of financial scams and the far-reaching impact such incidents can have on your business.

By upgrading to Level 2 and Level 3 credit card processing, you can achieve both of these outcomes in one go. What’s more, this act of leveling up is working for you every single transaction you make. It adds up to significant cost savings for your business and can result in improved client relationships as well.

Here’s a quick rundown on credit card fees and what Level 2 and Level 3 credit card processing can do for you.

Level 1, Level 2, and Level 3 Credit Card Processing Explained

Whenever a business opens a new merchant account with a payment processor, it is assigned one of three data processing levels. The level assigned is determined by the amount of customer and transaction data required when processing each transaction.

Level 2 and Level 3 transactions require more data since those usually involve higher transaction amounts, with the card owner often not present for the transaction. They tend to have a higher risk of chargebacks, if a transaction is unrecognized, unauthorized, or fraudulent. 

To offset this risk, banks and payment providers ask you for more data on the transaction and the parties involved in order to better justify a contested charge. In exchange for this more rigorous data collection, the bank offers you a lower interchange rate for Level 2 and Level 3 credit card processing.

The higher the transaction level, the lower the interchange rate. 

Level 1 Processing

This is the level opted for by most business-to-consumer (B2C) merchants, such as restaurants, retail shops, online stores, boutiques, hospitality outlets, and more. The majority of businesses in any market tend to be on Level 1. 

At this level, the customer paying for the transaction is usually the cardholder and has knowingly performed the transaction. The transaction amount itself is often smaller than that involved in Level 2 and Level 3 credit card processing. As a result, the amount of data required is fairly basic:

• Merchant name
• Transaction zip code
• Transaction amount
• Transaction date

Level 2 Processing 

Most business-to-business (B2B) merchants tend to fall under this category. At this level, you’ll be accepting corporate, business, and purchasing cards. These are used by business employees to pay for expenses such as travel, hotel stays, purchase of materials and products, and more.

Transaction amounts tend to be higher and more likely to be contested, since the cardholder (the designated employee whose name is on the card) may not always be the person paying for the transaction. You’re asked for more data to conduct transactions at this level:

• All Level 1 requirements
• Merchant zip code
• Customer code (only for government/purchasing cards)
• Merchant tax identification number (TIN)
• Sales tax indicator and amount
• Order number
• Invoice number

Level 3 Processing

You’re now familiar with Level 1 and Level 2 processing, but what is Level 3 credit card processing?

Like Level 2, merchants at Level 3 regularly accept large payments via corporate, purchasing, and government cards. It’s particularly useful for those who work with government agencies and process government transactions.

As you’d expect, there are stringent data collection requirements at this level:

• Line-Item Detail: This includes information about each individual product or service being purchased. Typically, the following details are needed for each line item:
  • Product Description
  • Quantity
  • Unit of Measure
  • Unit Price
  • Extended Amount (Quantity Multiplied by the Unit Price)
  • Tax Amount
• Customer Code: A unique identifier for the customer making the purchase, such as a customer number or account number.
• Order Number: A unique identifier for the transaction or purchase order.
• Merchant Tax ID: The merchant’s tax identification number.
• Destination Zip Code: The zip code or postal code for the shipping destination.
• Shipping Method: The method of shipping or delivery chosen by the customer.
• Discount Amount: Any applicable discounts applied to the transaction.
• Freight Amount: The cost of shipping or freight charges.
• Duty Amount: If applicable, the duty or customs charges associated with the transaction.
• Ship-From Postal Code: The postal code or zip code from which the product is being shipped.

Benefits of Level 2 and Level 3 Credit Card Processing

As a business, the biggest benefit is, of course, the reduced interchange rate. Say you’re a B2B merchant. At Level 1 processing, the interchange fee on a customer charge may come in at 2.5%. With Level 2 and Level 3 processing, you can reduce it by as much as 1%. 

For mobile payments with certain cards, you can further reduce that by 0.2% – 0.3% for every transaction, especially if it’s a face-to-face sale. In most cases, if you often perform B2B transactions and you haven’t upgraded to Level 2 or Level 3 credit card processing, you’re leaving a lot of money on the table. 

Another big advantage of upgrading is the additional transaction reporting you can provide to both your bank and your clients. This gives them more information to work with when reviewing unrecognized charges.

Credit Card Processing Fees Explained

When you charge a customer’s credit card for payment, the charge typically includes three things:

• The actual cost of the purchase
• Interchange fees
• Merchant services fees

The interchange rate is the fee paid by the merchant’s (your) bank to the cardholder’s bank. As a business, you then have to pay this fee back to your bank. The merchant services fee is what your payment processor charges you for facilitating this transaction. 

With a merchant services provider like Group ISO, you enjoy highly competitive pricing so that you save more on every charge. What’s more, through our industry relationships, we can offer some of the lowest interchange rates in the business, especially when transactions are done in person.

Combined, this lower fee structure creates significant cumulative cost savings for you, improving your operating margins. 

Partner With an Industry-Leading Payments Provider

Group ISO has been in business for over 20 years. Not only do we offer some of the best pricing and interchange rates in the industry, our PCI-secure solutions leverage cutting-edge technology to offer you unrivaled merchant services. You can integrate your payment solution with any of a wide range of ERP and accounting systems to streamline your back office operations.

Expect outstanding service and 24/7 live support in over 30 languages when you work with us. Cut costs, improve security, and grow your business by leveling up your Level 2 and Level 3 credit card processing by reaching out to Group ISO.