Not long ago I stood in line at my favorite coffee shop in town. There was a slight line ahead of me, but when the barista saw me, she mouthed, “Small Earl Grey – with Honey?” I nodded in approval.
I got to the counter – she swiped my card. And in the split second of swiping my card, my bank information was transferred to her bank – with the Visa Network in between. Approved.
Retail merchant account data and processing fees<
I sat at my table thinking about the impressive nature of the speed and verification of that transaction – and that it cost the coffee shop only ~2.7% of the $2 drink in front of me.
What’s even more amazing is that 2.7% is actually expensive. But the transaction fee actually has to be high for that coffee shop. The transactions carry a certain level of risk because there is little verification that I’m actually the guy that owns the card.
When that card was swiped, the system looked for 3 points of data – my account number, expiration date, and CVV. Other than that – there is little verification about me as a person. If I’m a fraud, and the bank finds out I used somebody else’s card, there will be charge backs to the coffee shop – which means they not only lose that sale, but will likely incur additional fees.
The Earl Grey steamed. By this point, I was ready remove and throw the tea bags away.
Business-to-Business transactions are less risky
I couldn’t help but notice that a few tables down, two men were talking about their taxes. A CPA with a commercial client – no doubt.
Now, I’m no leading expert of emerging payment technologies – but I had to assume that that commercial client was probably paying that CPA with a debit/credit card on a reoccurring basis. So my mind started to wander again.
What if that commercial client has been in business for 20 years? What if he has a predictable stream of cash flow, inventory, solid credit and has been a customer of that CPA for 15 of those 20 years? That would mean he was not that risky of a client.
“I wonder if that CPA pays 2.7% for that less risky transaction,” I thought. Finally, my tea was cooling down. I stopped scrolling through my phone and took a sip.
B2B merchant processing rates
Back to my phone. Google. “B2B merchant processing rates.” Woah – everyone’s trying to sell me something. I just wanted information. Well, I found it (thank you, Evolve Systems). To spare you the spam, let me give you the bottom line:
Level 3 Processing defined
When businesses pay other businesses with a corporate card, or P-Card (Purchase Card), they can qualify for what’s called Level 3 Processing. Remember when I bought my tea and, using 3 points of data, they processed my transaction? That’s a Level 1 transaction – high risk, therefore, high cost.
In a Level 3 environment, the merchant bank can capture 26 additional fields of data. The logic is – as information increases, risk decreases. If we can get the risk to decrease, we can get the price to decrease with it. Brilliant.
Most B2B businesses have the wrong merchant account
If you’re not confused already – try this one: Most businesses today are still paying retail rates on transactions that qualify for Level 3 Processing. Given the volumes of these transactions, this means that businesses are unnecessarily paying thousands of dollars in transaction costs.
Why are more businesses not taking advantage of Level 3 processing? How do you get Level 3 pricing for your specific business? Can you get a comparison for free?
Hey – I wondered those same things. But by the time I got there, my mug was empty. It was time to head to my next meeting. I’ll tell you what I learned in the next segment of this blog series.