What is interchange?
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.
What’s Level 2 and Level 3 processing?
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:
All card transactions must meet Level 1 requirements, which include the standard information needed to complete a transaction:
As all this information is standard, which means normal rates apply and are not negotiable.
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.
To attain Level 3 payment processing, you need to satisfy Level 1 and 2 requirements, as well as provide the following information:
Customs duty amount
Itemized values for (one or more):
Merchant product code
Cost per unit
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.
How does L2/L3 processing lower rates?
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.
Qualifications for Level 2 and Level 3 processing
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.
How much can I save?
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.
Lower payment processing fees equal higher profits for SaaS platforms
Because interchange makes up a large part of the base cost to process card transactions, prudent SaaS companies 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.
- BlogPublished 08.23.22
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