Level III Processing
Credit card processing methods fit into three levels: Level 1, Level 2, and Level-3. Each level is defined by how much information is needed to complete a payment, with Level 1 requiring the least for payment authorization. Today, we’ll focus on Level-3 as it is the most interesting, the most prevalent and the most impactful to both the issuer and the acquirer.
What is Level 3?
A characteristic of the MasterCard and Visa credit card interchange structure for purchases using a corporate card or a purchasing card is that these transactions allow additional information to be appended to the transaction by the seller before the item works its way through the interchange system from the acquirer to the issuer.
Level-3 processing provides more detailed information about the transaction to be conveyed back to the buying organization via the issuing bank. The most significant reason for supplying this information, at least from the merchant perspective, is that the interchange fees borne by the merchant as part of the transaction fees they pay, is significantly reduced. In addition, a special interchange category called ‘Large Ticket Interchange,” (LTI) requires Level-3 processing. This applies to the really large transactions that are prevalent in the B2B and B2G arenas. And when the dollars get big, so do the merchant’s savings from providing Level-3 line-item detail.
Level-3 payments require the most data out of the three processing levels. For comparison, Level 2 payments require information such as:
- Transaction amount
- Customer code
- Sales tax
Level-3 payments require all the data for Level 2 payments, but also must include more detailed information, such as:
- Item ID or SKU
- Item description
- Unit price
- Extended price
- Unit of measure (each)
- Commodity code
- Line discount
Historically, there have been some obstacles for merchants to provide Level-3 data. The most obvious is that card terminals don’t prompt for additional data, and if they did, you would be entering letters from a numeric keypad. Think about sending a text message on the little flip phones a decade ago and you will get the picture. What this really means is that merchants who want to supply Level-3 data to get the fee savings need to input their transaction information from a system using software that prompts them for the required information. Today, these systems programs are more integrated into a company’s technology resource and sometimes also integrate new security technologies like tokenization.
Why Level-3 processing?
Payment processing must strike a balance between saving money, efficiency and security. Level-3 processing reduces processing fees and, as we see above, increases the amount of data per transaction for parsing and organizing. It might seem that setting up Level-3 processing is time consuming, but there are ways to streamline the process, such as saving buyer information for future transactions. Set up is also eased by the fact that reputable payments organizations have processing solutions that are compatible with all major processing platforms.
Level-3 transactions are “cheaper” for the merchant than Level 1 and Level 2 ones because of the lowered interchange rates they can yield. Plus, with all the transaction details required, merchants can better track and monitor purchases, which increases efficiency and reporting power.
An example of Level-3 savings
So how much can a merchant save by supplying Level-3 data? Here are some examples from the MasterCard interchange schedule:
- Commercial standard interchange is 2.95% plus 10 cents.
- The Level-3 rate ranges depending on the size of the transaction and is evaluated and possibly adjusted twice annually. Currently the rate is 1.80% plus 10 cents if the transaction is less than approximately $7,500. The rate drops as the transaction amount grows. As the chart below shows, the higher the transaction amount, the greater the savings over the standard interchange category.
- The delta represents the specific amount in dollars that a merchant might realize, and an equivalent amount that is reduced to the issuing bank. You can note, below, that this gets serious in a hurry.
So is the attention to transaction detail in Level-3 transactions worth it to your organization? Well, it should be. Conveying Level-3 information provides a significant financial opportunity for merchants accepting corporate or purchase cards from their commercial customers. Even just one large P-card transaction per year can justify the investment in the capability to transact in this manner.
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