Credit card processing can be a complex subject at the best of times, but few merchants know that the processing they use is actually just one of three levels. On top of the credit card processing used by the vast majority of merchants, there are two additional layers – Level 2 and Level 3 – that are used by specific types of merchants, for specific types of business-to-business (B2B) and business-to-government (B2G) sales. 

So, what are Level 1, Level 2, and Level 3 credit card processing, who qualifies for each, how do merchants utilize them, and what kind of benefits do they offer to merchants, their customers, and the independent sales organizations (ISOs) providing payment services?

 

Level 1 Credit Card Processing: The Retail Basics

Level 1 is the credit card processing being used by the vast, vast majority of retail merchants making business-to-consumer (B2C) sales. Not only do most merchants use Level 1 processing, but most have to, because it takes an enormous number of transactions just to become eligible to sell with Level 2 processing. In the case of Visa, the requirement is at least 1,000,000 transactions annually to move beyond Level 1 – a number only a tiny percentage of merchants ever reach. 

Level 1 credit card processing requires four core pieces of data to be collected and submitted on each card transaction processed:

  • Total purchase amount 
  • Purchase date
  • Merchant category code
  • Seller name

It’s a very small amount of data – the minimum the credit card companies are willing to accept for the vast majority of merchants because the risks associated with lower sales volume and smaller purchases are fairly low. However, when the stakes start to rise, credit card companies want to know more, and that’s where subsequent levels come into play. 

 

Level 2 Credit Card Processing: High-Volume Sellers

As mentioned earlier, once sellers surpass 1,000,000 annual transactions, some things change. Between one and six million annual transactions, companies like Visa and Mastercard enable merchants to enter Level 2 – a process that sees their interchange fees reduced in exchange for the submission of additional transaction data and heightened PCI requirements. While Visa and Mastercard allow any merchants selling within the 1 to 6 million transaction band to automatically begin submitting Level 2 data if they choose to, other companies, like American Express, require merchants to apply and be approved before collecting or submitting additional data points. 

While each card company maintains its own standard, generally speaking, Level 2 credit card processing requires the following data to be collected and submitted on each card transaction processed: 

  • Total purchase amount 
  • Purchase date
  • Merchant category code
  • Seller name
  • Tax amount
  • Customer code / PO number
  • Merchant zip code

Level 2 processing offers discounts often up to 0.5% on base interchange rates for commercial credit cards. While there is technically no requirement for any merchant to upgrade to Level 2 just because they can, the security and pricing benefits make it an easy choice for the vast majority of sellers doing the minimum volume. 

 

Level 3 Credit Card Processing: Major B2B and B2G Sales

Level 3 processing requires the highest level of data collection. Access to Level 3 isn’t as volume-based as Level 2. Instead, the biggest barrier to accessing Level 3 processing is the technological ability to collect all the data, which is beyond most basic payments systems. It’s also worth noting that both Visa and Mastercard offer Level 3 processing, but Discover and American Express do not. 

Level 3 credit card processing requires the following data to be collected and submitted on each card transaction processed:

  • Total purchase amount 
  • Purchase date
  • Merchant category code
  • Seller name
  • Tax amount
  • Customer code / PO number
  • Merchant zip code
  • Ship-from postal code
  • Ship-to postal code
  • Order number
  • Invoice number
  • Product code
  • Freight information
  • Item description
  • Purchase line-item details

It’s a long list, and not all payment processors or payment systems are equipped to enable merchants to collect it all. However, accepting Level 3 payments offers some big benefits for merchants that go the extra mile to access them. First, Level 3 payments reduce interchange rates by as much as 1% thanks to the significantly reduced fraud risk. That represents a significant fee reduction that can either expand profit or be passed on to the customer in tight bidding situations. 

Equally, or even more importantly, many large corporate and effectively all large government transactions require Level 3 processing for monitoring, accountability, and compliance purposes. The additional data makes it much easier for large corporations and government agencies to track spending, helping reduce the risk of misappropriation of funds. As a result, merchants with access to Level 3 processing have access to a wider client base and potentially much more lucrative contracts than competitors without it. 

 

Ramping Up Merchants for Level 2 and Level 3 Processing

Accessing Level 2 and Level 3 credit card processing isn’t as simple as just meeting the transaction requirements, even with Visa and Mastercard, which don’t require merchants to submit applications for approval. Merchants must tackle two hurdles before they can enjoy the benefits higher-level processing has to offer; heightened PCI requirements and potential payments technology barriers. 

Heightened PCI Compliance Requirements

One of the ways credit card companies verify that merchants are eligible for Level 2 or Level 3 processing is through their PCI compliance attestations. For instance, since becoming a Level 2 merchant with Visa or Mastercard requires processing 1 to 6 million annual transactions, it also requires Level 2 PCI compliance – a higher standard than the requirements most merchants have to meet. 

It’s worth noting that there is a distinction between processing levels and PCI compliance levels. For instance, a merchant doing over 6 million transactions per year could potentially have Level 3 credit card processing, but they’d be PCI level 1 based on their extreme volume. Likewise, the vast majority of merchants who fall under Level 1 credit card processing are considered PCI level 3 or 4. 

Additional Technology Requirements

There are two levels of potential tech/service barriers that merchants can run into when considering upgrading their processing level, particularly when it comes to Level 3 transactions. The first is their payment processor, and the second is their tech stack. 

Unfortunately, not all payment processors have the ability to offer merchants Level 3 processing. As a result, merchants may be forced to switch processors if they want to do business with large corporations or government agencies. 

Merchants who can access Level 3 processing still need to be able to collect the data. Because Level 3 data is so in-depth, not all payments hardware and software is capable of collecting it in a streamlined manner. Merchants do theoretically have the option of collecting and submitting the additional data manually, but realistically speaking, Level 3 merchants need payments systems that can automatically collect the necessary fields. That may require upgrades. 

 

How ISOs Can Benefit from Level 2 and Level 3 Credit Card Processing

Because merchants stand to benefit from Level 2 and 3 credit card processing in multiple ways, ISOs stand to benefit by offering it. First and foremost, that entails an ISO ensuring it has at least one, but preferably multiple processing partners that offer all three processing levels. Having Level 2 and 3 processing available helps draw in larger merchants, including those making a change from a processor that couldn’t offer them what they need. To put it simply, having more processing options opens ISOs up to a wider pool of high-value customers. 

But ISOs can go beyond just processing to improve the value they offer merchants and, in turn, their ability to compete. PCI compliance is one area where merchants often feel lost, and the additional PCI implications of higher-level processing only add to the confusion. An ISO with a great PCI team that can make compliance as simple as possible can attract merchants by making their lives easier. 

 

About IRIS CRM:

IRIS CRM is the payments industry’s top customer resource management platform. It offers ISOs and payment facilitators (PayFacs) a suite of sales, productivity, and administration tools designed specifically to meet the unique challenges of the payments industry. 

From streamlined lead management to automatic residuals calculations, lightning-quick merchant onboarding, elevated service delivery, and more, IRIS CRM helps acquirers work smarter, enabling them to do more with their leads, recruit more merchants, maximize residuals, and save enormous amounts of time in the process. 

For more information about the many benefits a payments CRM can offer your independent sales organization of payment facilitator, reach out to a member of the team or schedule a free guided demonstration of IRIS CRM today.