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Credit Card Processing
August 6th, 2020

How To Lower Your Credit Card Processing Costs By Leveraging Data?

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As a business owner you understand that payments and payment processing is are not so simple. What looks like a few seconds to the customers is actually a complex process involving verification, calculations and checkpoints. There are several aspects to credit/debit card processing which lie between the merchant and other players. This goes beyond simple payment processing. This involves understanding levels of processing based on data levels and how this affects interchange rates.

Credit card processing fees is a combination of interchange rate and processing fee. Most clients end up paying high fees for processing due to higher interchange rates. However, there are ways to lower the processing fee by lowering interchange fees. This depends on the brands and type of credit card, the type of business and chargeback history. If you’re a medium or high risk business and your chargeback frequency is higher, you will most likely be in level 1 Data and will pay a higher interchange fee.

What is interchange?

Interchange is a big chunk of the processing costs incurred by the merchants. It is determined and pocketed by card issuing banks. Every time a transaction takes place, information is exchanged with an interchange category on the basis of a criteria. This criteria includes card type, brand, input method (dip, swipe, keyed-in, online), amount of transaction, etc. on the basis of rules a transaction is eligible for a particular category. As a business owner, your goal must be to qualify for the interchange category that is lowest. Interchange can be understood as the ‘wholesale’ fee of processing. Higher levels mean lower wholesale cost and cheaper processing.

Pass-through & tiered pricing model:

Credit card processing companies offer two models of pricing for companies- Pass through and tiered pricing. In a pass through pricing models, you pay the actual interchange rates and a separate markup applied by the processor. This mode allows you to lower your interchange rates. In a tiered pricing model, your processor benefits if interchange rates are lowered while you are still stuck in your tier or level.

What are data levels?

Data level (I, II & III) refer to the level/amount of data/information that you can collect from a customer during a transaction. It can be understood as control or levels of power over customer’s data. Interchange cost of the transaction decreases as the amount of data level increases. If a business passes more data in a transaction, it lowers its exchange fee and pays less overall processing fee per transaction. These 3 levels are used as a classification system for businesses to set interchange rates.

Processing levels and their requirements:

Levels depend upon how much data you collect from customers when you charge them. If you collect more data, you are on higher levels which means lower interchange fee. Here are some details about different data levels.

Level I:

This is the default level for all companies. Every business begins their its payment processing journey here. At this level are the basic players who collect only basic fundamental info during a transaction. Ex: card number, expiration date, billing address, zip code etc. These are mostly low risk merchants that usually perform ‘card present/in-person’ card transactions and have lower chances of chargebacks.

Level II:

At this level, data exchanged is a more advanced one than level I. This level is for businesses that deal in a considerable volume of ‘card not present’ transactions. Mostly B2B companies, ecommerce websites and government organizations. Businesses at level II can achieve up to 0.5% reduction on interchange rates.

Data exchange in level 2 transactions include:

  • All the information in Level I (card number, expiry date billing address, zip)
  • Other info like

1. Customer code (for purchasing cards only)

2. Tax amount

3. Card acceptor tax ID

Level II card processing is similar to Level 3, but needs less requirements. Level 2 can help you reduce processing costs but not as much as level III processing. This level requires a credit card terminal or a merchant gateway to handle the data at level 2. If you are a merchant and deal in large volume processing, you might think about upping to level 2 as it will significantly lower your processing costs. Level 2 is popular with commercial and corporate businesses. If you qualify for level 2 processing, you can exchange data for lowering interchange fees which is a win-win situation for both merchants and payment processors.

Level III:

Mostly high-risk merchants are qualified up to this level. It is used for B2B and B2G transactions that involve large corporations and governments. Exchange of information helps in monitoring and tracking of funds. The extra data compensates the interchange rates and makes them lower. A report of all the additional data is sent to card issuing corporations like VISA, MasterCard Mastercard etc. Data like this is useful for tracking customers, setting restrictions and gaining useful insights and patterns.

Merchants can achieve upto up to 1% discount on interchange rates. This level is also called an ‘enhanced data program’ because of its data intensive nature.

Level 3 transactions must include:

  • All the data from Level I & II
  • Discount/offer amount
  • Freight/shipping amount
  • Duty amount
  • Item serial number
  • Item commodity code
  • Item product code
  • Item quantity
  • Unit of measurement
  • Cost of 1 unit
  • Discount per line item

Level III processing can significantly lower interchange rates and overall processing costs and helps business owners keep a bigger chunk of the pie. Businesses should aim for higher data levels to save on processing fees.

How to switch processing levels?

Processing level can be changed but only when you are on a pass-through pricing model. As you move to a higher level, the cost of interchange decreases. IF If you have the correct software and pass the criteria, you can use the enhanced data program and the required software to collect more data. You can also hire a credit card processing expert or take help from your existing merchant services provider.

What are targets, downgrades, and enhanced data?

Target is the interchange category that you are aiming for. It will be decided according to the minimum requirement or criteria fixed by the banks. If your transaction doesn’t meet these requirements, it is automatically downgraded to a lower and more expensive interchange category. Enhanced data is the polar opposite of downgrading. Level II and level III qualify as enhanced data levels. These categories demand the maximum number of requirements to be met for qualification.


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