Credit card processing costs are some of the biggest expenses businesses face. For B2B businesses who are 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 in their business is by participating in Level 2 and Level 3 processing. We’ll break down how it works.
What’s in a Charge?
When a company charges the card of a customer, they have to pay processing fees. These include the interchange rate from the card brands (read more about interchange) plus the cost from their credit card processor to move the funds. Some companies charge a flat rate (like 2.9% per transaction) while others, like Fattmerchant, 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 in credit card fees. After all, B2B businesses are regularly charging corporate or purchasing cards, which can have a much higher interchange rate than consumer cards. That’s why businesses need to do everything they can to lower these rates where possible.
The fees that card brands decide to charge companies to accept their cards are issued to help offset the amount of money they lose from fraudulent charges. In general, the more risky a transaction is (or the more likely it is to result in a chargeback) the higher the interchange rate is. This is where processing levels come in.
Level 1, Level 2, and Level 3 Card Processing
The card processing level your business uses is related to how much information you collect about a customer when you charge them. By default, companies process at Level 1, which means that each transaction includes the card number, card expiration, billing address, and zip code. To process at Level 2 or Level 3, the business must collect more information. These processing levels are only available to B2B businesses or the government.
Discover cards do not offer any enhanced data programs for Level 2 and Level 3 processing. American Express offers Level 2 processing, but no Level 3 enhanced data program. These programs are most beneficial for companies that charge a lot of Mastercard and Visa cards.
Level 2 Processing Requirements
With Level 2 processing, you can achieve an interchange reduction of up to .50%. To qualify, transactions must be taxable and the tax rate must be between 0.1% and 30%. Level 2 transactions include:
- All the information in Level 1, plus:
- Customer code (for purchasing cards only)
- Tax amount
- Card acceptor tax ID
- Tax amount
Level 3 Processing Requirements
At Level 3, you’re providing even more information to achieve a discount of up to 1% on interchange. You just have to be willing to enter this information to achieve the savings. Level 3 transactions must include:
- All the information from Level 1 and Level 2
- Discount amount
- Freight/shipping amount
- Duty amount
- Item Sequence Number
- Item commodity code
- Item product code
- Item quantity
- Unit of measure
- Unit cost
- Discount per line item
- Line item total
Mastercard required fields:
- Product code
- Product description
- Extended item amount
- Debit or credit indicator
How to Change Your Processing Level
Both card present and card not present transactions are eligible for Level 2 and Level 3 processing, however, they are most likely to be used with card not present solutions like invoicing, recurring billing, and website payments. In order to use enhanced data programs, you need to be processing with the correct software that is built to accept the necessary fields.
Fattmerchant customers that want to start processing at Level 2 or Level 3 simply need to contact their account manager to get set up.