Credit card processing fees can be a significant expense for many businesses, especially those handling high transaction volumes or large B2B transactions. What if there was a way to reduce those fees? This is where Level 3 credit card processing comes into play. For businesses primarily dealing with other businesses or government agencies, Level 3 processing can significantly reduce costs through detailed data collection.

In this blog, we’ll explore what Level 3 credit card processing is, how it works, and why it could be beneficial for your business.

What Is Credit Card Processing?

Before diving into Level 3 processing, let’s quickly review the basics of credit card processing. When a business accepts a credit card payment, the transaction involves several key players: the cardholder’s bank (the issuing bank), the merchant’s bank (the acquiring bank), the credit card companies (like Visa or Mastercard), and the payment processor that facilitates the transaction. After a customer completes a purchase, their bank verifies and approves the payment. The merchant’s bank receives the funds, minus processing fees, which cover services provided by the various parties involved in the transaction.

Interchange Rates and Processing Levels

One of the most significant components of these fees are interchange rates. These fees are set by the credit card companies and are paid by the merchant to the cardholder’s bank in exchange for processing the transaction and covering any associated risks. Interchange fees can vary based on several factors, such as the type of card used, 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 fees. 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.

Processing Levels

  • Level 1
    Ideal usage: retail, hospitality, and B2C e-commerce
    Data required: transaction amount, data, and cardholder details
  • Level 2
    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
    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 3 Credit Card Processing

Level 3 credit card processing is specifically designed to address the needs of businesses that handle high-value, large-scale transactions. This tier of processing is tailored for B2B (business-to-business) and B2G (business-to-government) environments where transactions often involve complex payment structures, regulatory compliance, and additional data requirements. These transactions are typically higher in value than standard consumer purchases, and because of their scale, they carry different risk and transparency expectations from the banks and credit card networks involved.

To qualify for the lower interchange rates that Level 3 processing offers, businesses must provide comprehensive, itemized details for each transaction. This means that, in addition to basic information like the transaction amount and date, Level 3 processing also requires specifics such as:

  • Line-Item Data: Each item within the transaction must be detailed separately, including descriptions, quantities, unit costs, and item codes. This transparency provides a complete breakdown, which reduces risk for banks and makes transactions easier to validate.
  • Tax Rates and Tax Amounts: Detailed tax data is required, showing that the transaction complies with local and federal tax regulations. This data reassures card networks and banks that the tax component of the transaction is properly accounted for, reducing regulatory risk. 
  • Shipping Information: Level 3 transactions require shipping or freight details, including shipping costs and destination addresses. These details confirm that the goods or services are accounted for and help track the full scope of the transaction.
  • Discounts and Additional Fees: Any applied discounts, special pricing, or additional fees, such as surcharges, are also itemized in Level 3 transactions, giving a complete picture of the final cost structure.

This level of detail not only helps lower interchange rates by reducing perceived risk for credit card companies but also improves visibility and accountability in payment processing. Credit card networks view Level 3 data as a strong indicator of a low-risk, well-documented transaction. As a result, businesses that comply with Level 3 processing requirements benefit from cost savings that would be unavailable through standard processing tiers, enhancing their profitability on large-scale transactions. For businesses operating with complex orders or dealing with government contracts, Level 3 processing creates a framework that aligns seamlessly with their operational needs and compliance requirements, making it a strategic financial advantage.

Benefits of Level 3 Credit Card Processing Transactions

  • Lower Interchange Fees
    With Level 3 processing, businesses can enjoy substantial savings on interchange fees, particularly useful for companies with high-dollar, B2B transactions. Industries like manufacturing, wholesale distribution, corporate procurement, and government contracting often benefit most from these reduced fees.
  • Enhanced Security and Transparency
    Level 3 processing enhances security by requiring detailed data. This reduces fraud risk, boosts transparency, and strengthens the confidence of payment processors, translating into fee reductions. These transactions are less likely to incur chargebacks or disputes due to the added level of verification and documentation.
  • Improved Record-Keeping and Compliance
    Level 3 transactions involve extensive data collection, which improves record-keeping, supports auditing, and eases financial reporting requirements. This is particularly useful for businesses in regulated industries or those with rigorous internal compliance standards.

Is Level 3 Processing Right for Your Business?

While not necessary for all businesses, Level 3 processing can be a valuable tool for companies handling high-value, complex transactions. It’s particularly useful for industries that engage in detailed B2B transactions or government-related work, where compliance and documentation are critical.

Typical candidates for Level 3 processing include:

  • B2B Companies: Manufacturers, wholesalers, and distributors frequently manage substantial contracts, invoices, and complex data requirements for each transaction. Level 3 processing helps these companies provide the necessary transaction details, which aligns with their high volume of inventory purchases, bulk orders, and custom pricing arrangements.
  • Government Contractors: Businesses that contract with federal, state, or local government agencies often work under large contracts with specific reporting and regulatory obligations. Level 3 processing enables these companies to meet stringent transparency requirements by itemizing every detail, including tax data and shipping details, and ensures they benefit from reduced fees—a key factor in government contracts where compliance and cost efficiency are essential.
  • Corporate Procurement and Large Enterprises: Organizations with complex procurement needs and high-value purchases, like those in technology, infrastructure, and healthcare, often benefit from Level 3 processing. By providing detailed transaction data, including line-item breakdowns and tax calculations, these enterprises can maximize cost savings while ensuring accuracy in reporting and accountability in payment processing.

Technology and Requirements for Level 3 Processing

To implement Level 3 credit card processing, businesses need the right technology. Not all payment processors support Level 3 transactions, so choosing a processor experienced in B2B or B2G payments is essential.

Key Considerations for Choosing a Payment Processor

  • B2B Specialization: Not all payment processors are designed to handle the complexity of B2B transactions. Look for processors that specialize in business-to-business (B2B) payments and are experienced in managing Level 3 data requirements. These providers are more likely to have the infrastructure, security protocols, and customer support needed for handling high-value, complex transactions typical of B2B and B2G environments. A processor with B2B specialization can also offer features tailored for industries like manufacturing, wholesale, and government contracting, where Level 3 data is essential.
  • Automated Data Capture: To simplify the process and reduce the risk of human error, the payment processor should have an automated system for capturing and submitting Level 3 data, such as line-item details, tax amounts, and invoice numbers. This feature not only saves time but also ensures accuracy, which is critical for meeting Level 3 processing requirements and qualifying for the lowest interchange rates. Look for processors that integrate well with your invoicing or ERP system to pull data directly and minimize manual data entry.
  • Reporting and Analytics: Comprehensive reporting and analytics tools are essential for monitoring transactions, identifying trends, and ensuring compliance with Level 3 requirements. A payment processor with strong reporting capabilities can help you track cost savings, optimize data collection, and stay compliant with payment network guidelines. Additionally, these tools can provide insights into transaction patterns, helping you better understand your financial operations and identify opportunities for further efficiency and cost reduction. Look for processors that offer customizable reports and real-time analytics to keep your financial data organized and accessible.

Implementing Level 3 Processing

  • Choose the Right Payment Processor: Selecting the right payment processor is a critical first step in implementing Level 3 processing. Look for a processor that specializes in B2B transactions and has the capability to capture and submit the detailed data required for Level 3 transactions, such as line-item information and tax details. A processor with experience in managing large, complex transactions can provide you with the right tools and support to maximize your cost savings and streamline the processing experience.
  • Integrate with Accounting Systems: Seamless integration between your payment processor and accounting software is essential for automating data collection and reducing the chance of human error. This integration ensures that required Level 3 data, like itemized expenses and tax amounts, is automatically captured from invoices and purchase orders, minimizing manual entry. A well-integrated system can streamline record-keeping, make financial reporting easier, and help maintain compliance with Level 3 processing requirements.
  • Maintain Compliance: Implementing Level 3 processing involves strict compliance with PCI DSS (Payment Card Industry Data Security Standard) requirements, as well as specific data submission guidelines from payment networks. This may require training your finance and accounting teams on handling and safeguarding sensitive payment data. Proper compliance ensures that transactions meet industry standards, protecting both your business and your customers. Additionally, ensure that your payment processor offers PCI-compliant solutions and is knowledgeable about Level 3 data requirements to help your team stay on track.
  • Test and Monitor the System: Once Level 3 processing is set up, conduct test transactions to verify that all necessary data fields, like line-item details and tax rates, are accurately captured and submitted. Regular testing and monitoring allow you to identify any discrepancies or inefficiencies early on, ensuring optimal performance. After initial testing, monitor your processing fees and cost savings closely to ensure you’re benefiting from reduced interchange rates. Consider setting up regular system audits to continually assess performance and optimize processes, helping you achieve maximum savings and data accuracy.

Wrapping Up

Level 3 credit card processing offers significant benefits for businesses, especially those in B2B or government-related sectors. By providing detailed transaction data, companies can reduce interchange fees, improve record-keeping, and enhance security. Although it requires specific tools and systems, the savings can be substantial for businesses handling high-value transactions. With the right approach, Level 3 processing can help businesses optimize payment processes and strengthen financial performance. If your business fits this model, consider implementing Level 3 credit card processing to unlock these potential savings and efficiencies.

Ready to see if Level 3 processing is right for you business?

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by Clearent by Xplor

  • First published: November 08 2024

    Written by: Clearent by Xplor