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Understanding Level 2 & 3 Interchange Rates: A Comprehensive Guide for B2B and B2G Companies

By October 25, 2023No Comments

In the world of business-to-business (B2B) and business-to-government (B2G) transactions, one often overlooked cost is interchange fees. Surprisingly, many companies in these sectors are unaware of the significant savings that can be achieved by optimizing their payment processing.

At the core of every credit card transaction lies the exchange of customer and seller data. Typically, these transactions require only basic information, including card data, the seller’s name, and the merchant category code (MCC). However, as transactions become more intricate and high in value, such as those in the B2B and B2G space, the need for additional information becomes evident. Providing detailed transaction information in complex transactions minimizes associated risks, a practice appreciated by credit card companies, which reward businesses with lower interchange rates for their efforts.

Unfortunately, not all payment systems are equipped to collect the extra data necessary for complex transactions. To harness this functionality and reduce interchange costs, B2B and B2G merchants need access to platforms offering Level 2 and Level 3 payment processing.

Understanding Advanced Payment Processing

Payment processing is categorized into three levels: Level 1, Level 2, and Level 3. Each level has distinct purposes and specific requirements. Major credit card companies update rates and data requirements every April and October.

Level 1 Processing:

Level 1 is the most basic form of processing, suitable for standard consumer transactions. It encompasses the majority of payments. It requires merchants to submit minimal data, typically card information, the seller’s name, and the MCC. Level 1 interchange rates are the highest among the three levels.

Level 2 Processing:

Level 2 processing is more advanced and is typically used for B2B and corporate card transactions. It requires additional data points depending on the card brand, including tax amount, tax ID, tax indicator, customer code/PO number, and optional data points. The added data offers greater control over transactions and enables businesses to cut costs and manage operations more efficiently. Level 2 interchange rates are lower than Level 1 but higher than Level 3.

Level 3 Processing:

Level 3 processing is the most detailed and suited for large B2B and B2G transactions requiring comprehensive information to ensure security and authorized use of funds. It requires all the same data as Level 1 and 2, along with additional information like duty, commodity codes, product codes, item quantities, unit of measure, unit of cost, discount rates, discount per line item, line item total, shipping amount, destination zip, and country codes. Level 3 interchange rates are the lowest among the three levels.

Business Benefits of Level 3 Processing

While Level 2 processing offers greater control and transparency for businesses, Level 3 opens the door to tremendous opportunities. For ISOs, enabling those benefits and opportunities is a significant competitive advantage.

Key benefits that Level 3 processing unlocks include lower interchange fees, improved compliance (and access to highly regulated contracts,) better reporting and tighter fraud detection.

Lower Interchange Fees:

Because Level 3 transactions are more secure and less prone to fraud, major card brands offer discounts to incentivize them. Merchants accepting Level 3 transactions could see interchange reductions that are roughly double the discount for Level 2 transactions.

Although these savings may not seem like a big deal at first glance, they add up fast – especially on large and ongoing government purchases. For B2B merchants, an extra percent can go a long way towards shoring up profits. For B2G organizations, these savings can ensure they have the funds to outbid the competition for government contracts.

Compliance With Government and Industry Regulations:

For large B2B and B2G transactions, Level 3 data isn’t just nice to have; it’s a minimum requirement. There are often stringent reporting rules attached to institutional purchases, and any merchant unable to collect Level 3 data is disqualified from bidding, regardless of how good their price or service may be. That means Level 3 capability not only ensures compliance and reduces risk but also unlocks a valuable door for merchants looking to respond to government and industry proposals.

Enhanced Reporting Capabilities:

More detailed transaction data gives businesses an in-depth view of their spending patterns and business activities. This valuable insight aids in decision-making and business forecasting. Level 3 reporting also helps with accounting and reconciliation processes. By automatically producing and importing data into account systems, Level 3 ensures records are as accurate as possible while saving time.

Greater Security and Fraud Prevention:

Level 3 processing adds layers of protection to transactions and creates more loopholes for fraudsters to jump through before they can breach a company’s defenses. With fraud rates skyrocketing, greater security protects everyone – merchants, ISOs and their customers.

Finding the Right Level 3 Payments Partner

Identifying the need to offer Level 2 and Level 3 processing is the first step towards accessing lower rates, better security and new selling opportunities. The next critical step is finding a reliable payments partner with a proven track record of providing Level 3 collection capabilities – something not all processors can offer.

To find the right partner, you’ll need to conduct thorough research, find credible recommendations and ask potential partners about their advanced payment processing services. Remember, even if Level 3 processing isn’t part of the plan now, choosing a partner that offers it provides the flexibility to expand your operations in the future without the disruption of migrating to a new partner or platform.

A trusted payments partner like NMI will offer not only advanced processing but also the experience and expertise required for a smooth onboarding experience.

Level III Advantage With WNYMC

To ensure you have the tools to succeed, we are excited to announce a new value-added service: Level III Advantage. Level III Advantage optimizes B2B and B2G interchange rates on your behalf, reducing transaction costs and mitigating risk. With Automated Data Optimization, you can enjoy lower rates without spending hours entering data manually.

Offer your clients a cutting-edge solution that delivers tangible financial benefits while differentiating your services in the market.

If you’re ready to expand your offerings and leverage the benefits of Level III Advantage, we’d love to talk with you. Contact a member of our team for more information.