Interchange fees are unavoidable. 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).
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). 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.
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.
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.”
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.
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.
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:
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 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:
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.
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:
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.
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.
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.
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