We're going to level with you (all puns intended): Discussing credit card processing levels can be a pain. Like so much about credit card fees, it's a mystery to many.
But if you are a merchant who accepts credit card payments–and who isn't these days?—it is important that you have a clear understanding of the three levels used by the credit card networks to evaluate the risk involved in each transaction they accept. This is a major factor in determining the total amount you pay in fees for the privilege of accepting payments through credit cards.
Simply put, the more data you collect at the point of a credit card transaction, the higher the designated processing level, and the higher the level, the better rate you receive—and by better rate, we mean one with a lower cost.
The type of customer you serve matters.
Look at it this way: If you run a small e-commerce business selling to individual customers, your day-to-day operations are probably quite different from, say, a large waste management company. A small e-commerce business might have thousands of customers, while a large waste management company might only have a handful.
Both a small business and a large company face risks when accepting credit cards. However, the risks are magnified for the smaller business because of its numerous customers and because it probably does not possess as much information about its customers as a larger business. A larger business would likely have more information about each of its customers and can pass that information on to the credit card networks.
And as we said, more information means more secure transactions. And more secure transactions mean lower fees.
Now, let's get to know these levels better.
Level I Credit Card Processing—The most common.
Level I credit card processing typically involves transactions between businesses and average, everyday consumers. These transactions commonly occur when customers use their personal credit or debit cards for a purchase.
In such a transaction, only the most basic customer information is exchanged—card number, card expiration date, billing address, and ZIP code. Level I transactions are considered less secure because only a minimal amount of information is required.
Because they are less secure, they are therefore subject to a higher processing fee. So, while Level I transactions are very widespread and make up a large portion of retail and e-commerce environments, they do not qualify for a lower exchange rate.
Level II Credit Card Processing—Most common for B2B transactions.
Level II credit card processing involves transactions primarily occurring between businesses. In other words, these are B2B transactions. Included in this category are companies that accept commercial credit cards.
The exchange rates for Level II processing are lower than Level I rates for one very important reason: they require more information for a transaction to be processed and are, therefore, more secure.
While each card company maintains its own standards, generally, Level II credit card processing requires the following data to be collected and submitted for each transaction processed:
- Total purchase amount
- Purchase date
- Merchant category code
- Seller name
- Tax amount
- Customer code or PO number
- Merchant zip code
B2B transactions tend to be large and high-volume. However, Level II processing delivers discounts of up to 0.5% on base interchange rates for commercial credit cards.
Level III Credit Card Processing—Most common for B2G transactions.
This level of transactions requires the most data at the time of the transaction, resulting in the lowest processing fees. It's designed for B2B and B2G transactions, which are business-to-government transactions.
The data necessary to qualify for Level III processing include the following:
- Ship-from ZIP/postal code
- ship-to/destination ZIP code
- Invoice number
- Order number
- Item product code
- Item commodity code
Take a deep breath, there is more:
Qualpay performs at all levels
Yes, that's a lot of data points that need to be addressed to qualify for Level II or III card processing. Which is why you need a payment gateway when processing credit card transactions. A payment gateway is capable of collecting all this information. Because doing it all by yourself is simply too complicated.
And when it comes to selecting a payment gateway to help you manage all this data gathering, you'll want one that can capture this data securely and then process it as quickly as possible. Like, you know who. We'll give you one guess. The name begins with “q.”
Qualify for a lower interchange rate, and you'll reduce your payment processing fee
Interchange fees constitute the largest portion of business credit card processing expenses. Given this, it makes sense to try to reduce these fees to achieve substantial savings.
Unfortunately, interchange rates and fees are non-negotiable. They exist and are what they are—an unavoidable cost of being able to accept credit card payments.
But there is one way to make them less onerous: providing enough extra transaction data so you can qualify for the lower Level II rates. This is called interchange optimization.
Interchange optimization is the practice of strategically adjusting transaction conditions and data elements to qualify for the lowest possible interchange rates set by the payment networks.
Take the free Qualpay Savings Challenge to discover if you are optimizing interchange savings
The first step is evaluating whether you're enjoying the interchange rate that promises you the most savings is to take the Qualpay Savings Challenge
Upload one of your latest statements to us, and we'll create a custom audit of your interchange charges to see if you are paying more than you have to. Our advanced technology ensures you are utilizing the correct criteria to achieve the lowest interchange rate. This is called meeting the target interchange.
Whether your business qualifies for Level I, II or III processing, our team of experts can help you meet the target interchange. They will see that you are properly set up with all the qualifying data necessary to meet the card brands' rules.
