Home » Level 1, Level 2, and Level 3 Credit Card Processing Explained

When you swipe or dip your credit card, a lot goes on behind the scenes. If you’re a business owner, understanding Level 2 and Level 3 credit card processing can make a big difference in how much you pay in fees and how efficiently you handle transactions. 

These processing levels come into play for B2B (business-to-business) and B2G (business-to-government) transactions, where more detailed data is required to qualify for reduced interchange fees.

This article will break down everything you need to know about Level 2 and Level 3 processing. We’ll explain what this data is, how it’s used, and why it’s beneficial. You’ll also learn:

• The differences between Level 1, 2, and 3 processing.
• The types of transactions that qualify for each level.
• What you need to do as a merchant to start processing at Levels 2 and 3.

If you’re looking to save on fees and streamline your payment processes, this is the guide you need. Let’s dive in!

A quick intro to credit card processing levels

Credit card processing happens in tiers, known as Levels 1, 2, and 3 — each requiring more transaction data as you go up. These levels determine how detailed the information must be for a payment to be processed. 

Here is how major card brands support different credit card processing levels:

• Visa and Mastercard offer Levels 1, 2, and 3 processing. 
• American Express offers Levels 1 and 2 processing. 
• Discover offers only Level 1 processing.

For most businesses, Level 1 processing is standard. It only requires basic transaction details. Level 2 and Level 3 processing go a step further, needing additional data about the purchase. Here’s a quick breakdown.

Level 1 processing

Level 1 processing is the most basic tier of credit card transactions. It’s designed for consumer-facing transactions, where a customer swipes, dips, or taps their card to make a purchase.

It is suitable for everyday retail transactions where no additional reporting or itemized data is required, such as buying groceries or dining at a restaurant. 

Level 1 processing requires minimal data to complete a transaction, including only the essentials:

• Merchant name and location
• Transaction amount
• Date and time of the transaction
• Customer’s credit card number and expiration date

The major downside of Level 1 processing is the higher interchange fees. Requiring less data means the risk to the card issuer is greater, resulting in increased costs for the merchant. If you’re conducting business with other companies or governments, upgrading to a higher processing is worth exploring.

Level 2 processing

Level 2 processing requires merchants to include additional data points about the purchase which reduces the risk of the transaction. It is commonly used:

• For business purchases or government contracts, where accountability and detailed reporting are essential.
• In industries like manufacturing, wholesale, and professional services, that involve large payments and tax considerations. 

On top of the basic Level 1 data, Level 2 processing requires additional fields like:

• Customer’s tax ID or purchase ID
• Sales tax amount
• Invoice or order number
• Merchant postal code

Compared to Level 1, Level 2 processing comes with lower interchange fees. These savings can be significant, especially for businesses handling high-value transactions.

Level 3 processing

Level 3 processing is the most detailed and data-intensive tier of credit card transactions. It is used:

• For high-value purchases or large contracts, particularly in the government and corporate sectors.
• In industries like defense contracting, wholesale distribution, and technology procurement.
• When buyers require itemized transaction data for compliance, reporting, or budgeting purposes.

Level 3 builds upon Level 1 and 2 data requirements by adding even more detailed fields, including:

• Itemized purchase details (such as product descriptions, quantities, and unit costs)
• Freight or shipping costs
• Destination postal code
• Discount amounts (if applicable)
• Tax amount per item

One of the biggest advantages of Level 3 processing is the significant reduction in interchange fees. By providing detailed data, merchants lower the risk to card issuers, which results in cost savings.

The pros and cons of Level 2 and Level 3 transactions  

Both Level 2 and Level 3 credit card processing offer unique benefits for merchants, particularly those in B2B and B2G spaces. However, they also come with certain challenges.

Pros of Level 2 and Level 3 processing:

• Lower interchange fees: Providing detailed data reduces the risk for card issuers, leading to significant savings on interchange rates.
• Enhanced reporting: The additional data fields allow for more granular reporting, which is valuable for business clients and government agencies that require detailed purchase records for audits or compliance.
• Better client relationships: Meeting the reporting and compliance needs of corporate or government clients builds trust and can lead to long-term partnerships.
• Increased transparency: Level 3 data, in particular, includes itemized purchase details, fostering accountability and making it easier for clients to track spending.
• Competitiveness: Offering Level 2 or Level 3 processing may give merchants an edge in bidding for government contracts or corporate accounts.

Cons of Level 2 and Level 3 processing:

• Complexity in setup: Meeting the data requirements for Level 2 and Level 3 processing can be time-consuming and may require specialized systems or software integrations.
• Potential for errors: The additional data points increase the risk of input errors, which could delay transactions or lead to non-compliance.
• Additional training required: Employees or payment processors may need training to properly manage Level 2 and Level 3 transactions, adding to operational overhead.

Consider these pros and cons to determine whether investing in Level 2 or Level 3 processing aligns with your business goals.

How can merchants qualify for Level 2 and Level 3 card processing

Qualifying for Level 2 and Level 3 credit card processing requires meeting specific criteria and implementing systems to capture the required transaction data. 

Unfortunately, not all merchants qualify. Many high-risk industries, low-ticket merchants, and cash-based businesses are simply not eligible.

If you do qualify, follow these steps:

1. Choose the right payment processor: Work with a payment processor like SecureGlobalPay that supports Level 2 and Level 3 processing. Not all processors have the capability to handle the detailed data required at these levels.
2. Use a compatible payment gateway or POS system: Ensure your point-of-sale system or online payment gateway can collect and transmit Level 2 and Level 3 data fields.
3. Provide required data: Consistently include the additional data fields required for Level 2 and Level 3 transactions, such as sales tax, customer codes, and itemized details. 
4. Follow compliance standards: Stay compliant with PCI DSS (Payment Card Industry Data Security Standard) and other relevant regulations. Compliance helps build trust with both card issuers and clients.

If you need additional help, reach out to SecureGlobalPay and one of our industry veterans will answer all of your questions.

Level 2 credit card processing rates 

Three major factors affect these rates (applies to Level 3 transactions as well):

• Data accuracy: Any missing or incorrect data can result in a reclassification to Level 1, negating potential savings.
• Transaction size: Larger transactions typically see more significant savings at Level 2.
• Processor fees: Rates may vary depending on the payment processor and their agreements with the card networks.

When compared to Level 1, merchants can save up to 0.50% or more in interchange fees by providing additional Level 2 data.

Level 3 credit card processing rates

Level 3 credit card processing offers the lowest interchange rates available. 

Depending on the transaction size and card type, interchange fees for Level 3 transactions can be reduced by 0.75% or more compared to Level 2 — or around 1.5% compared to Level 1 transactions.

Always confirm that your payment processor offers a breakdown of interchange fees to ensure you’re receiving the full benefits of Level 2 and Level 3 processing. And it also doesn’t hurt to periodically review their processing setup to optimize savings and compliance.

Start processing Level 2 and Level 3 payments with SecureGlobalPay

If you’re ready to take advantage of the cost savings and detailed reporting that come with Level 2 and Level 3 credit card processing, SecureGlobalPay has you covered. Our platform provides everything merchants need to get started, including:

• Expert guidance: We’ll help you navigate eligibility requirements and set up Level 2 and Level 3 processing seamlessly.
• Advanced payment systems: Our payment gateways and POS solutions are equipped to handle the detailed data fields required for higher processing levels.
• Optimized rates: We work with all major card networks and processors to ensure you qualify for the lowest possible interchange fees.

Don’t miss out on the opportunity to lower your transaction costs and streamline your payment processes. Contact SecureGlobalPay today for a personalized consultation or get started by filling out our merchant application form.

Take the next step toward smarter, more efficient credit card processing — we’re here to help!