Level 1 is the most basic level of data, and it is the most common as well. This is what most consumer transactions fall under, and it requires the least amount of data to be authorized. Most merchants will fall under the criteria for Level 1 processing and will never need higher levels of data processing because they do not sell business-to-business or business-to-government. The data required for level 1 transactions are very simple: merchant name, merchant code, date of purchase, and purchase amount. Because level 1 transactions capture the least amount of data (and because the ticket sizes are generally much smaller), the interchange rates are higher than levels 2 and 3. Additionally, Level 1 transactions can be processed using a normal terminal or gateway.
Level 2 data processing is commonly used in business-to-business transactions. Along with the four data fields required for level 1, level 2 requires five additional pieces of data: sales tax amount, customer code, merchant zip code, merchant tax ID number, and for MasterCard, applicable women- or minority-owned merchant status. With this extra information, credit card companies assess that the risk of fraud is lower, which is reflected in lower interchange rates.
Since Level 2 requires more data, the equipment used to capture this data must be set up to do so. When accepting Level 2, most merchants have a payment gateway set up to automatically capture the data, which makes this process much less of a headache. However, a physical credit card terminal can be set up to accept Level 2 payments as well and the data can be entered manually if one so chooses.
Merchants who want to qualify for the lower interchange rates associated with levels 2 and 3 should speak with their processor to determine if it’s a feasible decision for their business and what they can do to accept it. Not all businesses need to process transactions that require levels 2 and 3 data, especially not if they’re primarily selling to consumers.