B2B Payment Processing: Level 2 & Level 3 Processing Explained

B2B payment processing is when the merchant is a business and so is the customer—so the seller is charging a fellow business for their products and/or services. While the actual process itself is the same, there are a few key differences between B2B and B2C payment processing such as preferred payment methods, rates, and even order minimums.

B2B, or business-to-business, is a unique business model that offers an opportunity for growth, high transaction values, and fewer customers to serve. It also requires different technology than the average B2C (business-to-consumer) merchant, including B2B payments.

Globally, about $120 trillion are processed in B2B payments each year, $25 trillion in the US alone. Below, we’ll look at B2B payment processing, also known as Level 2 and Level 3 processing, and how to set it up for your business.

What is Level 2 & Level 3 B2B Payment Processing?

B2B payments processing is categorized in one of two ways: Level 2 or Level 3. The main differences boil down to data verification and processing rates. Level 2 requires fewer data from the customer but comes with slightly higher rates as a result, while Level 3 collects more customer information and generally provides merchants with lower credit card processing fees.

Generally speaking, Level 2 and Level 3 B2B payment processing happens for card-not-present transactions. Additional customer data is required because these types of transactions are more likely to be fraudulent. For example, in traditional retail transactions (also known as Level 1 payment processing) a fraudster only needs the payment information rather than the physical card itself.

Collecting more customer data makes the transaction more secure and reduces the risk of fraud or chargebacks. This reduced risk is what allows for lower processing fees.

Why You Need to Evaluate Your B2B Payment Processing

The B2B payments industry has a lot of room for improvement. Per Deloitte, 35% of businesses consider processing fees a major challenge, costing them nearly $8 to process a single supplier payment.

You might be setting up B2B payments for the first time, or you might already have a system set up. Regardless of your situation, the cost is just one of a few reasons to evaluate your B2B payments processing setup.

According to The B2B Payments Tipping Point, there are a number of key benefits from choosing an innovative B2B payment processor including fewer errors and fraud, better efficiency, reduced costs, and improved cash management.

Timely Payment

Most small businesses are familiar with chasing payments. It’s an unfortunate reality of business. In fact, one analysis found that as many as one in 10 invoices are paid late. And when it comes to B2B payments, that number jumps to nearly half. In fact, 30% of businesses say processing time is a major challenge, taking about 30 days to complete payment.

When you optimize your current B2B payment processing, you can make it easier and simpler for both you and your customers to complete the transaction.

Risk Mitigation

More than three-quarters of businesses suffered from fraud (or an attempted fraud) in 2020, and it’s a challenge that’s on the rise. Unfortunately, many payment platforms don’t offer the security needed to protect your data and your customers’ data. Upgrading to a more secure B2B payment processor will help mitigate the likelihood of falling victim to fraud.

Data Management Efficiency

Technology has made data available to businesses of all sizes, which can be both a blessing and a curse. On one hand, you have more information than ever before on which to base important business decisions. On the other, it can become unwieldy and difficult to manage. Not to mention missing data can put you back when it comes to reconciling your accounts. In fact, missing data cost $3.3 trillion in a single year.

B2B Payments Frequently Asked Questions (FAQs)

What’s the Difference Between a B2B and B2C Payment?

A business-to-business transaction is different from a business-to-consumer transaction because the purchaser is another business instead of an individual. While an individual may technically be making the purchase in a B2B payment, the business is ultimately responsible to pay for it. The individual may simply have a corporate credit card linked to their employer’s account.

B2B payments are often higher in value, and they’re increasing. If you think about it this way: a consumer likely has a smaller personal budget than a business budget for a company. As such, B2B payments typically process higher amounts. Therefore, payment processing rates affect B2B and B2C businesses differently and should be a consideration when shopping around for your payment processor.

How Do Businesses Pay Each Other?

Businesses pay other businesses in B2B transactions in a number of ways, paying by a check being the most popular.

When it comes to Level 2 and Level 3 B2B payment processing, this is for card-not-present transactions. So it’s important to note that checks are also decreasing in popularity. More than 30% of businesses expect to use fewer checks, with 37% planning to use more e-payment options with virtual cards.

What Are the Best B2B Payment Processors?

The best B2B payment processors offer a secure, reliable platform that can accommodate a variety of payment methods with reasonable rates. Many different companies and institutions offer B2B payment services including banks and credit card networks. Many small businesses use third-party merchant service providers to process B2B payments.

For more guidance choosing the best B2B payments processor for your needs, start with these posts:

• What Is a Merchant Account? Definition & Providers
• Best Merchant Services Providers
• Cheapest Credit Card Processing Companies

Bottom Line: B2B Payments in 2021

Though similar to B2C settings, B2B payment processing has a whole different set of considerations. If you cater to other businesses as your main customer, it’s worth taking a look at ways to safeguard your business, build trust in your customers, and eliminate hassle when it comes to managing B2B payments.