Level 2 and Level 3 Credit Card Processing Explained
Meaghan has provided content and guidance for indie retailers as the editor for a number of retail publications and a speaker at trade shows. She is Fit Small Business’s authority on retail and ecommerce.
Karina Fabian writes and reviews business software, services, and topics for starting a business, startups, and small businesses. She has more than seven years of business writing experience.
This article is part of a larger series on Payments.
Credit card processing is divided into three levels depending on the amount of information needed and who is making the purchase: Levels 1, 2, and 3 (or Levels I, II, and III).
Level 1 is the most common and generally used for commercial purchases by individuals. Meanwhile, Levels 2 and 3 are used for government and business purchases and require more information.
Level 2 and 3 credit card processing can save your company money—but you need a card processing service that can handle additional data. You should also ensure you qualify for the reduced rates. We’ll explore Levels 2 and 3 credit card processing further in this guide.
What are the Differences Between Level 2 and Level 3 Credit Card Processing?
Level 2 and Level 3 processing primarily differ in data verification and credit card processing fees. Level 2 requires less customer data but offers a smaller discount in rates than Level 3. Level 3 collects more customer information but generally provides merchants with the best discounts. Collecting additional customer data makes the transaction more secure and reduces the risk of fraud or chargebacks.
Level 2 and Level 3 Credit Card Processing at a Glance
Level 2 | Level 3 | |
|---|---|---|
Used for | Business-to-business (B2B), corporate | B2B, corporate, government (B2G) |
Average savings (via reduced interchange rate) | 0.5% | 1% |
Information needed | Basic purchase info, plus more details on taxes, orders, invoice | Basic purchase info, plus more details on products, discounts, shipping |
Card providers | Visa, Mastercard, American Express | Visa, Mastercard |
Qualifying merchant services/payment gateways | Some | Fewer |
Transaction levels |
| Visa and Mastercard: 20,000–1 million in ecommerce transactions |
Learn more about the B2B market and the trends shaping it.
Data Needed for Level 2 and Level 3 Processing
Different providers list different types of information collected at each level, and we’ve provided a comprehensive list compiled from several sources. Some information may overlap. Note that it is always best to check with your payment provider about what information is needed.
Level 2 | Level 3 |
|---|---|
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Who Uses Level 2 and Level 3 Credit Card Processing?
In general, you can benefit from Level 2 or 3 card processing if you process a high number of purchases from businesses, corporations, commercial enterprises, or the government. Any kind of business can qualify, from retail to service, as long as it meets the customer set and minimum number of transactions.
How Do I Qualify?
To qualify for Level 2 and Level 3 processing, you must meet the minimum transaction levels and fill out the applications for each card provider. Your credit card processing service may be able to help you with this. Take a look at the following requirements:
- Visa: Process between 1 to 6 million Visa transactional annually for Level 2, and 20,000 to 1 million ecommerce transactions annually for Level 3. Fill out a Self-Assessment Questionnaire and submit an Attestation of Compliance form. You’ll need to conduct a quarterly network scan by an approved scan vendor to maintain your qualifications.
- Mastercard: Process between 1 to 6 million Mastercard transactions annually for Level 2, and 20,000 to 1 million combined Mastercard/Maestro transactions annually for Level 3. Fill out an Annual Self Assessment form and an Onside Assessment of Merchant Discretion form, and conduct a quarterly network scan by an approved scan vendor.
- American Express: You need pre-approval before doing Level 2 data processing. You need to submit Level 2 Merchants’ Validation Documentation, which includes summaries of findings of the Quarterly Network Scan and a completed Payment Card Industry (PCI) Self Assessment Questionnaire.
Benefits of Level 2 and Level 3 Processing
The biggest benefit of level 2 and 3 processing is the decrease in card processing fees, which is especially helpful considering that B2B and B2G purchases tend to be much larger—this means that the savings will also be bigger. In general, Level 2 interchange rates tend to be about half a percent lower than standard, while Level 3 rates are discounted a percentage or more.
Because more information is gathered, Level 2 and 3 purchases are also more secure and less likely to be disputed. This means fewer chargebacks for you.
Not all merchant accounts and payment gateways can handle Level 2 or 3 processing, and some (such as those with flat rates) do not offer discounts. Check out our evaluation of the best B2B payment solutions.
How Do I Start Taking Level 2 and Level 3 Payments?
Once you have approval, you need to make sure you have a credit card processing terminal and point-of-sale (POS) software that can handle the additional data.
- Merchant services: Many merchant services can help you with processing Level 2 and 3 payment data. Among those we review, Stax, Payment Depot, and Dharma Merchant Services come to mind. These services offer interchange-plus pricing that takes into account the reduced interchange rates provided by the card services when using Level 2 and 3 payments.
- Payment gateways: Sometimes, the merchant service and payment gateway are the same. However, if you need a payment gateway, which handles the transfer of information, then speak to your merchant service or check out our list of the best payment gateways.
- POS system: Your POS or invoicing system needs to be able to collect the data needed for the increased processing level. You’ll also need to train your employees to ensure that the information is provided. For example, if you process a payment for a nonprofit, you won’t need to calculate taxes. However, to qualify for the Level 2 or 3 processing, this information is required, so you must put in a zero rather than leaving that area blank. See our guide to the leading POS systems and software for options.
- Card terminal: Not every card terminal knows to retrieve the data needed for Level 2 or 3 processing. Be sure you discuss your needs with your vendor and make any software upgrades necessary to ensure the data is collected and transmitted.
Level 2 and Level 3 Payments Frequently Asked Questions (FAQs)
If you are not getting Level 2 or 3 business rates, then there are a few things that could be happening:
- You don’t qualify to receive the special pricing. See our section above.
- Your merchant account or gateway is not processing the transactions accordingly. You need to check your contract or contact your payment processor about this.
- Your payment processor charges a flat rate. If you use a flat rate processor like Square, you will not get special rates.
- Your equipment is not sharing the correct data. Be sure your card terminal is up to date and programmed to handle enhanced data programs.
Your customers can benefit from higher processing as well. Business cards allow corporations to set spending limits and add restrictions. The additional data you provide through the Level 2 and 3 processing helps them track sales tax details and ensure the card is being used properly.
Level 3 requires additional product identification information and freight or shipping cost information, in addition to the shipping and tax information required for Level 2. Businesses also need to meet certain volume requirements for Level 3. The benefit is lower processing fees.
Discover does define Level 2 data, but it does not offer a decreased interchange rate.
Bottom Line
Level 2 and 3 credit card processing is not for every business, but for those that do steady commerce with other businesses, corporations, or the government. These entities must charge with a Visa, Mastercard, or (for Level 2 only) American Express. In return, you need a payment processor and equipment that can handle the increased data. You get reduced card processing fees and your customers get more information about the purchases made by employees.
