How to Get Lower Rates With Level 2 and Level 3 Credit Card Processing

At a high level, interchange refers to the fees charged by the major card brands and the payment processors. This is a fee no one escapes. As mentioned above, though, L2/L3 can lower rates in some cases when properly applied.

Tip: If you want to get deeper into the subject of interchange, our blog Understanding Payment Processing Fees is just what you’re looking for.

The card data (at the time of purchase) that’s passed from the merchant to the payment processor defines the processing level. By default, all credit card processing occurs at Level 1. If you want to process card transactions at Level 2 or 3, you’ll need to go the extra mile.

Let’s take a look at each level:

Level 1:

All card transactions must meet Level 1 requirements, which include the standard information needed to complete a transaction:

• Card number

• Expiration date

• Billing address

• Zip code

• Transaction amount

As all this information is standard, which means normal rates apply and are not negotiable.

Level 2:

Level 2 steps it up a notch and requires that the merchant include information for these additional fields:

• Sales tax amount

• Customer reference number

Because you are providing additional information, you open the door to receiving a lower fee.

Level 3:

To attain Level 3 payment processing, you need to satisfy Level 1 and 2 requirements, as well as provide the following information:

• Discount amount

• Shipping amount

• Customs duty amount

• Itemized values for (one or more):

  • Discount amount

  • Description

  • Quantity

  • Commodity code

  • Merchant product code

  • Cost per unit

  • Sales tax

  • Unit of measure

You only need to provide one itemized value to reach L3 status. There’s no drawback to providing information for more (it can only be a benefit), but doing so won’t lower your rate any further.

As you can see from the examples above, when you “level up” your payment processing, you’re providing more data about the transaction. This, in turn, minimizes the risk of chargeback and fraud.

For example, it’s harder for the bad guys to use a stolen credit card number when you’re processing at Level 2 or 3. The cardholder will also see the additional information, which can help jog their memory about a transaction they forgot about or help them recognize the merchant the charge is coming from.

As a result, you’re rewarded with a lower interchange fee on qualifying transactions.

Before you get too excited about the thought of lowering your rates with L2/L3 processing, let’s talk about the caveats. Unfortunately, not every business or transaction qualifies.

Luckily, the requirements for Level 2 and Level 3 processing are pretty straightforward:

• Must be a business-to-business (B2B) transaction and/or a government purchase

• Only corporate, business, or purchase cards are eligible

• Transactions must be US-based

Although most B2B companies can qualify for L2/L3, there are some merchant categories that are ineligible because of their high-risk nature. Also, the additional data needed to qualify for L2/L3 processing creates a bit more friction for your customers at the time of purchase.

Where the card networks fit in

The major card brands have varying degrees of participation when it comes to L2 and L3 processing. Even if a transaction qualifies for L2/L3, you may not receive a lower interchange rate if a customer used a specific card. For example, Visa and Mastercard support Level 2 and Level 3 processing, but American Express only supports Level 2. Discover currently doesn't support either option.

Another thing to keep in mind is that not all gateways support L2/L3 like Finix’s does, so you’ll want to verify that your payments provider has a gateway that supports it.

You may be wondering what the savings from L2/L3 processing look like. While it’s different for every business and is transaction based, we’ve put together some hypothetical examples in the graphic below.

Because interchange makes up a large part of the base cost to process card transactions, prudent businesses are always looking for ways to lower the cost. This is especially the case for CNP transactions, which are higher risk, and therefore, come with higher fees.

L2/L3 is a very real way platforms can lower their interchange rates with processors.

What’s unique about Level 2 and Level 3 processing at Finix is that we validate that you’re passing information (fields) correctly as part of your onboarding experience. This allows us to verify whether or not you are receiving L2/L3 pricing. We also offer transaction-level detail so that you always have a clear picture of your fee profiles.