Selling B2B? Remember 2 & 3
By Karisse Hendrick, Editor-at-Large, CardNotPresent.com
In e-commerce, the B2C (business-to-consumer) space hogs nearly all the attention. However, according to a recent study by Forrester Research, B2B (business-to-business) e-commerce sales will reach $780 billion in the U.S. this year—more than twice the $304 billion predicted for retail e-commerce by the end of 2015. With larger budgets and bigger needs, businesses prefer to make purchases online for everything from office supplies to break room snacks to manufacturing supplies. While companies are making the bulk of these purchases on Websites, the next five years will bring change. According to a study by Frost and Sullivan, the B2C marketplace model favored by Alibaba and Amazon will make the leap to B2B, contributing to an expected $6.7 trillion dollar B2B market worldwide by 2020. Merchants rushing to fill this need, however, must be aware of certain challenges that can make serving the B2B market more costly than it should be.
While it is just as important to accept cards for B2B purchases as it is for B2C transactions, most merchants overlook a setup in their B2B payments process that could lead to significant cost savings. While the steps for processing card payments is the same for B2B and B2C, there is a different set of data requirements for corporate cards that ensures the card-holding company has information it needs for tax exemptions and balance sheets. If merchants do not supply this information at the time of the transaction, those transactions are downgraded and charged a higher rate of interchange by the issuing bank.
What is Level 2 and 3 data and why do I need to supply it?
The data transferred from the merchant to the issuing bank through the payments process is divided into levels. Level 1 data includes the merchant’s name, the transaction amount and the date of the transaction. All CNP merchants include Level 1 data in the information string for all types of credit card purchases. Typically, cards that require only Level 1 data are cards issued by U.S. banks used by individual consumers.
U.S.-issued corporate cards require transactions to include Level 2 data (e.g., tax amount, 16-character customer code, tax identification and merchant minority code). For merchants processing B2C and B2B transactions in the U.S. only, sending Levels 1 and 2 data with their transactions generally is fine. If a merchant processes a large volume (or high value) of U.S. government or international corporate cards, however, Level 3 processing is advised to get the best processing rate on those transactions. In addition to Level 2 information, there are 16 additional data fields needed for a transaction to qualify as a Level 3 transaction. Item product codes, item descriptions, quantities of each item, the tax rate of each item and the specific freight amount are some examples.
While some companies choose to source the data in-house, the information needed to populate these fields often can be filled out by payment gateways. It may take extra time working with the gateway for a merchant to ensure the data is accurate, but the benefits of supplying this extra information to the issuing banks could be significant. In some cases, the difference in interchange between a non-qualified purchase on a corporate card and a purchase qualified using Level 2 or 3 data could be almost a full percentage point. The average non-qualified corporate purchase is assessed at an interchange rate of nearly 3 percent, while a qualified purchase is much closer to 2 percent of the transaction amount. For merchants that have a high average ticket amount on B2B transactions, the cost of implementing this change would be made up in interchange reductions rather quickly.
How do I know if I need Level 2 & 3?
Except for the higher fees, there are no other penalties for not processing this information. Some merchants say they have noticed an increase in authorizations on corporate cards once the processing of Level 2 and 3 data has been implemented. Hard data on that, however, is scarce. Because many merchants do not review their monthly itemized interchange report, it is difficult for them to know if this information is or is not being processed and if it is affecting their profit margins. The best way to determine if you are not processing Level 2 or 3 data on corporate cards is to review the itemized interchange summary in your monthly merchant statement. Each card type has a different way of abbreviating “corporate” or “business” cards on the statement, but looking at the number of these transactions to determine if they make up a significant portion of your business is the first step.
Second, look at the rates those cards are being charged and if the statement contains any terminology like “downgrade” or “non-qualified,” you probably are paying more interchange than you could be. For merchants who are charged interchange in a “bucketed” or “tiered” system, it will be harder to determine the exact source of any downgrades, however not processing this information could be contributing to the “non-qualified” bucket. You also can have your merchant processing bank perform an interchange assessment for you. Your account manager should be able to tell you if you are processing without this information and what the savings would be if you upgraded the level of data being sent with your transactions. Merchants that did not have a significant B2B business when their merchant account was first set up, but have developed one, could benefit significantly from performing this exercise.
As the market for business-to-business CNP commerce continues to grow, it is increasingly important for merchants to be ready to support these needs on all levels, from fulfillment to payment processing. Being aware of the changes needed to support the payments piece will not only make the AP accountants for your business customers happy, but also could result in significant cost savings for your own company.