Credit card transactions are not all created equal. There are three levels of credit card processing (Level 1, Level 2, and Level 3), and which one a particular transaction falls under depends on the type of card used. Depending on your business, you may encounter all of these types. Here’s what you need to know about each level.
Level 1: Personal Credit Card Transactions
If you sell products mainly to individual consumers (in other words, you’re a B2C business), you’ll likely deal mostly with Level 1 processing. This is the simplest type of processing and has the fewest requirements for a successful transaction. In fact, the only information that’s required for a Level 1 sale is your business’s name, the amount of the transaction, the date, and your business’s category code (you can look yours up here). As long as the customer is using a regular credit card (not a business or government account) that’s issued by an American bank, Level 1 rules apply.
Level 2: Business and Government Credit Card Transactions
Businesses generally have stricter requirements for credit card sales because they need to keep close control over who is using their cards and for what purpose. Level 2 processing is designed to provide this additional data in a streamlined fashion, giving businesses the information they need without undue hassle. In addition to all Level 1 requirements, Level 2 processing also requires that the following data be passed along with the transaction: the tax amount, the customer ID number, your state and zip code, your tax ID number, and whether or not your business is minority- or woman-owned. If these details aren’t all present in the processing data, the transaction is downgraded and additional fees are charged. Avoid these fees by making sure you’re providing all the required information. Don’t worry – most POS systems will automatically recognize when a Level 2 card is swiped and will prompt you to enter this data.
Level 3: Corporate and Government Credit Card Transactions
Level 3 processing is similar to Level 2 but with even more requirements. It is designed for large corporate and government accounts that need the maximum amount of control and detail. In addition to all the requirements of Level 2, Level 3 processing also needs each product’s item code or ID number, a description of the products and services sold, the number of items sold, the unit of measure of each item (gallons, sets, pairs, etc.), the zip code for shipping (if applicable), freight and duty amounts (if applicable), the order or ticket number, whether or not a discount was applied, the extended amount (quantity x unit price), the type and rate of tax applied, whether the transaction was credit or debit, an alternate tax identifier (other than your tax ID number), and whether or not the line item price for each item already includes applicable tax. Note that most POS systems aren’t actually able to support Level 3 transactions out of the box because they do not have the capability to enter line item data. Contact your credit card processing partner to make sure you’re ready to accept these types of transactions if you think they might come up.
Why Bother? Better Rates!
If all of this sounds like a hassle, we hear you! There are, however, incentives for making sure you’re entering all of this data properly. Level 2 and 3 transactions qualify for lower rates, which is great news for you. Level 2 transactions tend to save you .05% to .50% over your Level 1 rates, and Level 3 transactions can save you .25% to 2.5%. That can really add up! The truth of the matter is that you don’t get to choose whether or not you accept these higher level cards. Your agreements with the card issuers (Visa, MasterCard, etc.) require that you accept all cards issued by those companies, no matter their level. It’s smart to familiarize yourself with the requirements for each level and make sure your technology is up to the task, even if you don’t think it’s very likely that you’ll see Level 2 and 3 transactions at your business.
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