Level 2 and Level 3 Credit Card Processing Explained

When processing credit cards, merchants generate transactions. And these transactions are sorted into three categories.

In this article, we’re going to explore what these different levels mean, and what you can expect when you’re using each of them.

Simply put, each transaction generated by a merchant that captures credit cards is at one of these levels. All transactions start at Level 1. Here, the base level of data required by credit card companies is passed along. If the same transaction is passed with more data to qualify the transaction, it may be able to use Level 2 or Level 3 processing. Transactions at these levels can enjoy significantly lower rates – if you’re set up with technology and a credit card processor that facilitates this.

First, though, we’re going to talk about specific features that are common to all levels.


The three-level system of categorizing transactions determines whether those transactions are qualified or not.

Certain transactions, or those that are qualified, are eligible to receive better interchange rates. Merchants passing enough data to use Levels 2 and 3 can enjoy significantly lower interchange rates on their transactions. Since most Level 2 and Level 3 merchants also process large volumes of transactions, this means they get to save even more because they are at that level.

This is the only benefit that Level 2 and 3 processing confers: Transactions at these levels have lower interchange rates. However, credit card processors are under no obligation to charge you less— you can pass the additional data, but they might not give you the better rate.

If you remember from our earlier articles, the interchange rates are the greatest part of the markup that all credit card transactions are subject to. The major card networks determine these fees, and they are updated twice a year.

Interchange fees were created to cover potential fraud, handling costs, bad debt costs, and the overall risk of approving the transaction.

Different card networks will have slightly different specific requirements to obtain Level 2 or 3 processing. They may also use different names for the same information.

Usually, the additional data required falls into about 15 – 20 fields. However, in some cases, up to 100 different fields may need to be used.

These transaction levels are sometimes referred to by their Roman numerals — in other words, Level I, Level II, and Level III.

The major difference between the levels is the amount of data and information collected for each transaction.


When you first sign up for a merchant account, you’ll be processing credit cards at Level 1. Most transactions are at this level, and if yours are, it’s nothing to feel ashamed about.

After all, not every merchant can take credit cards. But if you’re at Level 1, by definition you can!

Most Business to Consumer outlets (B2C) are at this level. Businesses that make the majority of their money from ordinary people and their credit card payments, such as retail shops (Target, Kroger, McDonald’s, Netflix, and many others) are typically placed at this level.

Level 2 and 3 credit card processing offers better interchange rates per transaction. Sometimes, though, Level 1 merchants can get slightly better rates (although not as good as true L2 or L3) by asking their customers to enter the CVV security code and/or their billing zip code with the transaction.

As for the data collection requirements of Level 1, they are just the following:

    • Merchant Name
    • Transaction Code (either the Authorization code or the Declined Code)
    • Transaction Date


The majority of merchant accounts using Level 2 credit card processing are Business to Business operations (B2B).

Some B2B companies of note include Salesforce, Cisco, FedEx, Microsoft, and Docusign.

Processing Level 2 data requires a standalone terminal or gateway that’s equipped to capture and handle L2 data.

Usually, Level 2 merchants see better rates than L1 merchants — up to 0.5% lower.

One major difference between these merchants and those at the previous level is that Level 2 merchants typically accept different types of corporate, business, and purchasing cards not available to the general populace.

Why don’t more merchants use Level 2 (or Level 3) processing, though?

The main cause is that many B2B companies use payment processors that don’t have the proper experience working with B2B credit card payments. Therefore, their credit card terminals and/or payment gateways are usually not capable of or set up properly to accept that kind of data.

Additionally, the data processing requirements for Level 2 are greater than those at Level 1. This means that for a transaction to qualify for Level 2 credit card processing, it needs to include all the data required from Level 1 accounts, plus the following:

    • Merchant Postal Code
    • Merchant State Code
    • Customer Code
    • Merchant Tax ID
    • Tax Amount
    • Merchant Minority Code

Easy Pay Direct can facilitate Level 2 transactions for you! Just ask us how.


This level of credit card processing was initially created to curb excessive government spending. It allows invoice information, including line item details, to be passed to the cardholder’s bank statement.

To obtain Level 3 processing, a merchant must accept either purchasing cards, corporate cards, or have a government spending account (which are typically issued by Visa and Mastercard).

Most governmental entities and some companies require line item details to appear on their bank statements. Therefore, if a merchant intends to accept governmental payments, they must meet the exacting standards of Level 3 pricing.

When you provide this additional data to credit card issuing banks, they consider the transaction less risky. Therefore, they reward the transaction with a Level 3 qualification, and its attendant better interchange rates.

Generally, Level 3 qualified transactions see savings of 0.8% to 1.5% per iteration.

That might not seem like much of an improvement. But since Level 3 merchants typically do a lot of sales volume, that savings can add up quickly!

Level 3 processing rates also depend on whether your gateway can pass that kind of data. Not all gateways can!

Lastly, Visa and Mastercard have special rules for this kind of processing.

One of them is that if a merchant runs a pre-authorization on a credit card, the transaction must be captured within 72 hours. Another is that if you do not estimate freight and capture the transaction for over 10% of the pre-auth, you will have to use the higher interchange rate of 2.95%.

Adhering to these rules is worth it! Most transactions will incur a standard interchange rate of 2.95%, while Level 3 qualified transactions can enjoy rates as low as 1.75%.

At this level, the largest transactions take place. Because of this, and the inherent risk involved, more detailed information is required for transaction approval.

The greatest data requirements are found in Level 3 credit card processing.

When processing Level 3 transactions, all the data from Levels 1 and 2 must be present. The following additional details are also required:

    • Alternate Tax Amount
    • Item Product Code
    • Item Quantity
    • Item Description
    • Item Extended Amount
    • Item Unit of Measure
    • Item Net/Gross Indicator
    • Ship From Postal Code
    • Destination Postal Code
    • Destination Country Code
    • Freight Amount
    • Duty Amount

Easy Pay Direct can facilitate Level 3 transactions for you as well. Just ask us how!


When you’ve completed your application, we’ll connect you with your personal New Client Specialist. They will guide you through the rest of the application process, and be your single point of contact for any questions you might have.

Once we have assessed your business model, we will classify your business based on its unique payment processing needs.

After that, your Certified Payment Specialist will get in touch with you. This person will be your main point of contact with Easy Pay Direct. They will get to know you and your business so that your merchant account will work flawlessly.

Then you can step back and focus on your business! You’ll know that your large digital goods merchant account is in good hands. And of course, we’ll contact you immediately if something requires your attention.


At Easy Pay Direct, we pride ourselves on making your business life easier — and facilitating the growth of that business.

We have been doing this for years, and have helped countless businesses achieve their full potential.

Check out some of our testimonials. We would love to help you achieve your goals.

Start your EMAP application below or call us at: (800) 805-4949 | Get Set-up with a Merchant Account »