Level III Credit Card Merchant Processing Information

Level III Merchant Credit Processing can greatly improve your profitability, if you are doing business with the Federal government.  I learned this through trial and error a couple years ago.  There are many variables with credit card processing rates, but the 3 main components are:  Transaction Fee, Discount Rate, and Interchange fee.

The discount fee is the % (percentage) which your merchant service provider will charge you to process a credit transaction. 

My first merchant account charged me a 2.74% discount rate and I thought that was a great rate.  My average transaction size was $10,000 (the Federal Government is who I do business with).  On a 10K charge, the actual cost of was around $550.00.  If you are wondering how it went from $274 (i.e. the 2.74%) discount rate to $500.00+ it is from the interchange portion of the processing fee.

Interchange is the non negotiable portion of the credit card transaction.   This fee is based on the card which your customer is using, and you have no control over it.  After searching on the Internet, I learned about Level III Credit card processing. 

Level III processing was exactly what I needed, as the Federal government uses a special purchasing government Mastercard.  By switching over to Level III processing, my new discount rate was .30% + interchange.  The end result was a huge savings.  The same $10,000 would now only cost me around $200.00 vs. the original $550.00. 

With Level III card processing, you need to capture more detailed information for each credit card transaction.  What this means is that in addition to the standard information (I use a web interface provided through RBS Worldpay), you also enter in line item information.  For example, if a customer purchases 3 items from you, you will need to enter in the total charge information, AND break it down by line item.  You will need to enter information such as: qty, unit of measure, line item description, etc.  By entering all the extra information you can qualify for a much better discount rate.

The purpose of level III card level data is to give the accountants better control (from the purchaser’s side).  By entering individual line item information, this allows the government to keep much better track of the purchasing cardholder.  It is much harder for the end user to obscure information this way.  In exchange for your “help” by providing detailed charge information, you will get a much better rate.  If you are in a low margin, high dollar business this can be a huge amount of savings. 

The biggest downfall of using Level III is the extra amount of data entry for capturing your transaction.  For my business, it is extremely worth the pain from the extra data entry.  Unfortunately, QuickBooks does not offer Level III credit card processing (that I know of).  My main accounting work is done on QuickBooks, and I do my Level III card processing through an external web interface.  What this means is that I have to double enter back the “receive payments” into QuickBooks.

If you are doing large dollar transactions with Federal government customers, looking into Level III processing can definitely worthwhile.