To maximize your business income from your customers’ credit card, virtual, or purchasing card payment transactions, it’s essential to understand bank interchange processing fees and the difference between Level 1, 2, and 3 payment processing.
What are interchange fees?
Interchange fees are transaction fees that are paid to the issuing bank whenever a customer uses a credit/debit card to make a purchase. These fees cover handling costs, fraud, bad debt costs, and the risk involved in approving the payment.
Which levels are used for business customers?
There are three levels of credit card processing. Level 1 is typically used for consumer customers but can also be used for business transactions. It requires the least amount of information, so it has the highest interchange costs due to the higher risk level. Levels 2 and 3 are generally best for business users as long as they process at least one million transactions annually. Since Levels 2 and 3 require more customer information, they have more affordable and secure fees.
Level 1 Processing
Level 1 data includes basic information about a transaction, including the amount, card number, card expiration date, transaction date, and general merchant information. Level 1 processing is required if a merchant has fewer than one million annual transactions.
Level 2 Processing
Level 2 data requires all the Level 1 data plus other details, such as sales tax, sales tax indicator, customer code or purchase order number, merchant zip code, and data specific to vertical industries, such as ticket number and passenger details for airline ticket purchases.
Moving to Level 2 is voluntary, but the financial incentive is significant. Once a merchant hits one million annual transactions, they usually qualify for the lower interchange rates of Level 2 for corporate, commercial, government, and B2B transactions, as long as they provide the required data.
Level 3 Processing
Level 3 is typically for larger business-to-business transactions for merchants that qualify for Level 2 but also meet additional data requirements for payment processing, such as commodity and product codes, quantities, item descriptions, shipping and freight information, and units of measure.
Compliance Considerations
High-transaction volumes require merchants to achieve PCI compliance, which lowers a card program’s risk of chargebacks. For instance, once a merchant reaches one million annual transactions and achieves Levels 2 and 3 processing, they are also required to achieve the higher Level 2 PCI compliance standards.
Government and Large Corporate Transactions
Levels 2 and 3 are typically required for transactions with government entities or large corporations since those levels of processing also help with tracking and auditing. They also provide more detailed information for merchants to analyze transactions and improve their business operations.
Per-Transaction Flat Fee Option
Businesses also have the option of a per-transaction flat fee applied to all transactions in its category regardless of the type of credit or debit card used. A flat transaction fee typically combines a percentage markup with a flat fee markup. For example: 2.7% + $0.10 per transaction.
Levels 2 and 3 Deliver the Best Options for Businesses
Level 2 and Level 3 processing provide the most secure processing with the lowest rates. If you’re doing business with government or large corporate entities, Level 3 may be required. Otherwise, Level 2 processing requires less customer data and offers a smaller rate discount than Level 3. Based on the merchant’s pricing model, both levels may result in reduced interchange fees and fewer chargebacks.
Want to get started today?
PayNation can help! Whether you currently have a payments processor or you’re new to B2B payments, connect with PayNation today.
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