Level 2 or Level 3 Processing – What are they?

Merchant account holders will be familiar with the tier structures that determine how much they pay their bank for every successful credit card transaction. Known as the three tier structure it sets a different percentage rate according to the type of transaction that you process, and essentially boils down to the risk your bank takes in approving the transaction. These per transaction fees are known as discount fees.Government and corporate credit cards are prone to fraud for rather obvious reasons. If you allow customers to pay for goods and services using a Credit Card Processing facility ñ be it online or at point of sale ñ you might have noticed that payments by government or corporate card are charged at the highest tier rate out of the three tiers, the non-qualified rate. This is because banks add a risk premium to the fee you pay them, because of the higher risk associated with payments made through government and corporate cards. However as a merchant you probably have little choice other than to accept government and corporate cards and swallow the extra costs. The upside is that you receive the funds for goods delivered and services rendered straight away, whereas large institutions can delay when it comes to sending checks or doing wire transfers. What you may not be aware of is that many banks that offer merchant accounts also offer merchants the ability to charge these cards at a lower rate, if the merchant is able to supply certain additional information. Called level 2 or level 3 data, this additional information reduces the perceived risk of authorizing a transaction on a government or corporate card.

As an example, for transaction over $5,000 a merchant can save on the discount fee, by supplying a purchase order number that is associated with the transaction that the card is being charged for. Additional criteria exist whereby discounts can be further reduced. Usually you need to talk to your merchant account provider to set up a level 2 or level 3 merchant account, and your merchant account provider will probably put you through a thorough review process, but the benefits and costs savings of having this advanced facility can be substantial.

How substantial the benefits of level 2 or level 3 merchant account facilities will be for you, will depend on your typical customer profile. A business that retails consumer goods may encounter the odd business or government purchase, if any at all, and would probably not be affected by the occasional inflated discount fee. If, however, you operate a business that provides strictly business to business (B2B) services or if you sell goods or materials used exclusively by businesses you will be doing yourself a disfavor by not investigating level 2 and level 3 merchant account facilities. It is even more important if your transactions involve extremely large amounts or if you operate on a tight profit margin.

The good news is that the merchant account space is now so competitive that we will probably continue to see innovation ñ innovation driven by the need for every bank to outdo its competitors.

Leave a Reply