Credit card processing fees are a burden for many businesses, especially those with high transaction volumes. But what if there was a way to lower those fees without changing your payment provider? This is where Level 2 credit card processing comes into play. For businesses that deal primarily with other businesses or government agencies, Level 2 data processing can be a game-changer, offering a way to significantly reduce costs.

In this blog, we’ll dive into what Level 2 processing is, how it works, and why it could be a smart move for your business.

Business owners implementing level 2 processing

What Is Credit Card Processing?

Before exploring Level 2 data processing, it’s important to understand how credit card transactions work in general. Every time a business accepts a credit card payment, the transaction passes through a series of steps involving several key players: the cardholder’s bank (the issuing bank), the merchant’s bank (the acquiring bank), the credit card companies (such as Visa or Mastercard), and the payment processor, which facilitates the entire flow. Once a customer makes a purchase, their bank verifies the transaction and approves the payment. The merchant’s bank then receives the funds, minus any processing costs and fees, which are split among the various parties involved in the transaction.

Interchange Rates

One of the most significant components of these fees is the interchange rates. This fee is set by the credit card companies and is paid to the cardholder’s bank in exchange for processing the transaction and covering any associated risks. The interchange rates is not fixed and can vary based on several factors, such as the type of card used (e.g., rewards cards typically have higher fees), the transaction amount, the industry the business operates in, and most importantly, the amount of data provided during the transaction. The more detailed the information submitted with a transaction, the lower the risk for the bank, which often translates into lower interchange rates. This is where processing levels (Level 1, Level 2, and Level 3) come into play, with each level requiring progressively more data and in return, offering lower fees as a result.

Processing Levels

  • Level 1 Data
    Ideal usage: retail, hospitality, and B2C e-commerce
    Data required: transaction amount, data, and cardholder details
  • Level 2 Data
    Ideal usage: B2B, government contractors, wholesale trade
    Data required: transaction amount, sales tax amount, customer zip code, merchant zip code, invoice number, tax identification number (TIN)
  • Level 3 Data
    Ideal usage: Large B2B, B2G, manufacturing, corporate procurement
    Data required: All level 2 data + line item details, freight/shipping details, destination zip code, discount amount.

As you can see, the more detailed the data, the lower the interchange rates can be.

Understanding Level 2 Processing

Level 2 data processing is specifically designed for B2B scenarios that typically involve higher transaction amounts and more complex payment structures compared to B2C transactions. These transactions often require additional documentation and verification due to their higher value and the nature of the relationships involved. By providing more detailed information during the payment process, Level 2 data processing helps reduce the perceived risk for the credit card companies, resulting in lower interchange rates for the business. This makes it an ideal option for businesses in industries like manufacturing, professional services, wholesale, and government contracting, where high-dollar transactions are the norm.

Unlike Level 1 processing, Level 2 data processing gathers more data to enhance the visibility and accountability of the transaction. This data includes additional details and customer information such as the sales tax amount, customer tax identification number (TIN), invoice number, customer code and the merchant’s postal code. By offering this extra data, the payment becomes more transparent, allowing the issuing bank and card networks to better assess the legitimacy and risk associated with the transaction.

The extra transparency benefits both the business and the payment processor. For the payment processor, the risk of fraud or chargebacks is reduced because the transaction is more thoroughly documented. For the business, the added data processing not only leads to lower interchange fees but also improves internal record-keeping and compliance, which can be beneficial for auditing and financial reporting. Additionally, the reduction in fees can be especially impactful for businesses that frequently process large, high-ticket transactions, leading to significant cost savings over time.

Benefits of Level 2 Credit Card Processing Transactions

  • Lower Interchange Fees
    One of the most significant benefits of Level 2 data processing is the reduction in interchange fees. Business operations that qualify for Level 2 data processing can often save a substantial amount on their processing costs, especially if they process high-value transactions regularly. These savings can be particularly impactful for businesses in industries like manufacturing, construction, and government contracting.
  • Enhanced Security
    Level 2 data processing adds another layer of security by requiring more detailed information during the transaction. This reduces the likelihood of fraudulent transactions and gives payment processors more confidence, which contributes to fee reductions.
  • Improved Record-Keeping
    The additional data collected during Level 2 transactions also makes it easier for businesses to maintain accurate records. This is especially helpful during tax time or when auditing is required, as the extra information is automatically tied to each transaction.

Is Level 2 Processing Right for Your Business?

Not every business needs Level 2 data processing, but for those that do, the cost savings can be substantial. Level 2 data processing is particularly beneficial for businesses that frequently deal with other businesses (B2B) or government agencies, where transactions are often larger and more complex than standard B2C transactions. In these cases, the lower interchange rates associated with Level 2 can make a significant difference to a company’s bottom line over time.

Industries that typically benefit from Level 2 data processing include:

  • B2B Companies: Industries such as manufacturing, wholesale distribution, and corporate procurement often deal with large purchase orders, contracts, and recurring transactions, making them ideal candidates for Level 2 data processing. These businesses may also handle specialized pricing, sales tax calculations, and shipping details, all of which align well with the data required for Level 2 transactions.
  • Government Contractors: Businesses that provide products or services to federal, state, or local governments are frequently involved in high-value transactions, making Level 2 a valuable tool for reducing processing fees. Additionally, government contracts often require detailed invoice tracking and compliance with specific financial reporting standards, both of which are facilitated by the detailed data required in Level 2 transactions.
  • Professional Services Firms: Consultants, engineers, legal firms, and other professional services organizations that work with corporate clients or government entities often process large payments for projects or services rendered. These transactions benefit from the transparency and lower fees of Level 2 data processing, especially when dealing with long-term contracts or project-based work.

Technology and Requirements for Level 2 Data Processing

To take advantage of Level 2 data processing, businesses need to ensure they have the right technology in place. Not all payment processors support Level 2 transactions, so it’s important to select a processor that offers this feature. Many processors that specialize in B2B transactions or government-related payments will have built-in support for Level 2 data processing. This often includes the ability to automatically capture and submit the required data, such as tax amounts, customer code, and invoice numbers, reducing the manual work required.

Integrating the payment processor with your accounting system is also ideal for seamless data collection and accurate reporting. This ensures that transaction data flows smoothly between your internal systems and your payment processor, minimizing any potential fraud or errors and making it easier to track transactions for compliance and reporting purposes.

Is the Extra Effort Worth It?

While Level 2 data can offer substantial savings on interchange fees, businesses must consider whether the additional requirements are worth the effort. Collecting and inputting the required data for each transaction can take extra time and resources, particularly if it’s done manually. However, for businesses that handle a high volume of large amount transactions annually, the cost savings from reduced fees can quickly offset any additional effort.

Performing a quick cost-benefit analysis can help determine whether Level 2 data processing is the right choice for your business. Consider how many transactions you process annually and the typical transaction value. If you’re processing a significant number of high-dollar payments, especially in a B2B or government setting, the potential savings on fees can add up to thousands of dollars each year. Additionally, many modern payment processors offer automated systems to streamline data entry, making the process more efficient and less labor-intensive.

If your business regularly processes large, high-value transactions in a B2B or government environment, Level 2 credit card processing can be a powerful way to reduce fees, improve reporting accuracy, and optimize your payment processes. With the right technology in place, the extra effort required to meet Level 2 data requirements is often more than compensated by the long-term savings on processing costs.

How to Implement Level 2 Data Processing

If you’ve determined that Level 2 data processing is a good fit for your business, the next step is to implement it. While the process may seem complex at first, with the right payment processor and systems in place, transitioning to Level 2 data processing can be relatively smooth and lead to significant savings. Here’s a step-by-step guide to help you get started:

1. Choosing the Right Payment Processor

Not all payment processors support Level 2 data processing, so it’s crucial to select one that meets your business’s needs. When choosing a payment processor, consider the following:

  • B2B Specialization: Look for processors that specialize in B2B transactions or have significant experience handling business-to-government (B2G) payments. These processors will likely have more robust tools for managing the specific data requirements of Level 2 data.
  • Level 2 Data Submission: Ensure the processor can automatically capture and submit the necessary Level 2 data, such as tax amounts, invoice numbers, and customer codes. Some processors may also offer advanced features, such as real-time data verification or integration with business tools that simplify this process.
  • Reporting and Analytics: Many modern payment processors offer built-in reporting and analytics tools that help you track transactions, identify trends, and ensure you’re collecting the right data for Level 2 data. These features can make it easier to monitor your savings and optimize your payment processing.
  • Cost Structure: Evaluate the processor’s fee structure and ensure that the savings from implementing Level 2 data will outweigh any potential transaction costs, such as monthly fees or software charges. Look for a processor that offers competitive rates for Level 2 transactions to maximize your savings.

2. Integrating with Accounting Systems

Once you’ve chosen a payment processor, the next step is to ensure it integrates smoothly with your business’s existing accounting systems. This integration is essential for automating the collection of Level 2 data and maintaining accurate transaction records.

  • Seamless Data Flow: Integration ensures that transaction data, including the additional Level 2 requirements like tax amounts and invoice numbers, automatically flows between your payment processor and your internal systems. This reduces the need for manual data entry, minimizing the risk of human error and streamlining your record-keeping process.
  • Automated Data Collection: Many payment processors offer automated tools that capture the required Level 2 data directly from invoices or purchase orders, reducing the workload for your team. Ensure that your accounting system supports this automation to save time and improve efficiency.
  • Software Compatibility: Confirm that the payment processor is compatible with your current software solutions. Whether you’re using a cloud-based system like QuickBooks, a customized ERP solution, or another accounting platform, the integration should be smooth and provide real-time access to transaction data.

3. Helping to Ensure Compliance and Adhering to Regulations

Level 2 data comes with specific regulatory requirements, especially when it comes to collecting and submitting detailed transaction data. Maintaining compliance with these regulations is crucial to avoid penalties and maintain the lowest possible interchange rates.

  • Payment Network Guidelines: Each payment network, such as Visa or Mastercard, has its own guidelines for what constitutes a valid Level 2 transaction. These guidelines include the specific data that must be submitted and the format in which it needs to be provided. Make sure your payment processor is up to date on these guidelines and can help your business meet them.
  • PCI Compliance: As with any credit card processing, maintaining compliance with the Payment Card Industry Data Security Standard (PCI DSS) is critical. PCI compliance ensures that your business is securely handling sensitive credit card information and protecting against data breaches. This is particularly important with Level 2 transactions, as the additional data collected increases the amount of sensitive information being processed.
  • Training Your Team: Ensure your finance and accounting teams are trained on how to manage the additional data required for Level 2 data processing. This includes understanding the requirements for collecting sales tax information, customer codes, and other specific details. Many payment processors offer training or support materials to help businesses meet these requirements effectively.
  • Regular Audits: To maintain compliance and ensure you’re getting the lowest possible interchange rates, conduct regular audits of your card transactions. This will help identify any gaps in customer data submission or compliance issues and allow you to correct them promptly. Payment processors have reporting tools that can make this process easier by automatically flagging transactions that don’t meet Level 2 data processing standards.

4. Testing and Monitoring the System

After integrating the new payment processor and ensuring compliance, it’s essential to test the system thoroughly and monitor its performance over time. This includes running several test transactions to ensure the correct data is being captured and that your accounting systems are properly syncing with the payment processor.

  • Test Transactions: Run test payments to verify that all Level 2 data is accurately captured and submitted. Check that sales tax, customer codes, and other details are correctly populated and ensure that the payment processor’s system is correctly identifying transactions as Level 2.
  • Monitor Fees and Savings: Once Level 2 data processing is in place, keep a close eye on the interchange fees you’re being charged and compare them to the savings you anticipated. Your payment processor’s reporting tools can help you track the fees associated with each transaction and verify that you’re benefiting from the reduced rates.
  • Adjust as Necessary: As your business grows or your transaction volume changes, reassess your payment processing setup to ensure it’s still the most cost-effective solution. If you notice that you’re not receiving the full benefits of Level 2 processing, it may be necessary to adjust your data collection practices or explore other payment processors that better fit your needs.

Wrapping Up

Level 2 credit card processing offers significant advantages for businesses, particularly those operating in the B2B or government sectors. By providing more detailed transaction data, businesses can benefit from reduced interchange fees, enhanced security, additional reporting data and improved record-keeping. While it may require some initial setup and the use of specialized payment processors, the potential savings can make a considerable impact on a company’s bottom line. If your business regularly handles large transactions and operates in industries like manufacturing, wholesale, or professional services, it’s worth exploring Level 2 processing to see if it can help optimize your payment processes and reduce processing costs. With the right tools and a proactive approach, implementing Level 2 credit card processing could be a smart financial move for your business.

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by Clearent by Xplor

  • First published: October 25 2024

    Written by: Clearent by Xplor