In the latest episode of Payments Dialog, Nathaniel Talbott talks with the team from US Transactions Corp. about the value of Level 2 and Level 3 metadata for credit card processing. Typically used in business to business card transactions, Level 2 and 3 metadata provide added information and validation to support the processing of a transaction. And the benefits to the merchant can be dramatic -- nearly 1% savings on a given transaction.
As a result, businesses that process significant volumes of transactions in a B2B environment via credit cards should investigate whether adding this extra metadata to their model makes sense. Not all gateways offer support for Level 2 and Level 3 metadata. So, it's important to look at the support before adopting a gateway if you process significant volumes of B2B transactions via credit cards. Or, more powerfully, by connecting with multiple gateways so that relevant transactions can be routed to the best matched gateway for your need.
In this discussion, Nathaniel chats with Wade Tetsuka, president and founder of US Transactions Corp. and Casey Benko, Director of IT at US Transactions talk through the benefits and approaches to including Level 2 and Level 3 in your transactions.
NATHANIEL: All right so I'm super excited to have Wade Tetsuka and Casey Benko with me. This is our fourth Payments Dialog and that we've hosted here at Spreedly we love talking about these topics. And today what we want to talk about is level 2 and level 3 metadata. Let‚Äôs contextualize that in the context of level 1 metadata for credit card transactions and maybe the best way to start out is just for the two of you to give a quick intro what you do and why you care or know about Level-2 and Level-3 metadata. WADE: Thanks Nathaniel so I'm a founder and president of US Transactions corporation and we are a merchant service provider a credit card processing company. We specialize in merchants or clients that are transacting business to business transactions with credit cards so they're accepting a lot of credit card payments and it's a business-to-business type of transaction. So our clients do an average transaction size of like around $600 per transaction so it's very different from a like a retail consumer type of transaction scenario. We don't have clients that are restaurants retail stores that type of stuff. That's why this topic of level 2 and level 3 metadata is very relevant to us and I will get into some of that in more detail but that's our background. We've been in business since 2009 and we really love what we do. NATHANIEL: Casey, tell us a little bit about yourself and what you do everyday. CASEY: Well I'm the director of IT here at the U.S. Transactions Corp and I come from a system integrations background and more specifically when it comes to payments ten years ago I was lucky enough to have built with my boss at the time and myself an actual PCI compliant system to collect and store payments for the real estate industry. And it had over a hundred thousand dollars of transactions a month and I learned a lot when it comes to integrating with payment systems and the security around it and luckily I'm glad I don't have to do that anymore when it comes to these clients so what I do at U.S. transactions Corp is well we have some very specific customers that can save a lot of money by implementing level 2 and level 3 data but we don't want them to tear out their systems so the goal here is my goal is to find the path of least resistance to get them to be able to save that money without having to spend more than they save. NATHANIEL: Yeah trying to find that ROI in implementations can be challenging. So we've been talking a lot about Level 2 and Level 3 metadata I mean what is it? What are we actually talking about what why are there levels what types of data are we talking about? WADE: So the different levels of data level one level two level three. Level one data is really the basic level of data that's required in order to process a credit card transaction. And I would say you know 99 percent certainly in the high ninety percent of all credit card transactions just go through with level one data. That works well when you get your credit card statement and Nathaniel at the end of the month and you see all your credit card charges right and all you see on every you know about all your charges you only see three things right you see the date the name of the merchant or wherever you shopped at and the dollar amount of the transaction. That's it that's all you know about all of your transactions for. That's level one data and invariably I'm sure you've had the situation where you see your credit card statement you see a charge on there from some merchants. That's the name is you know X Y Z and you don't remember ever going to that store or you know buying anything from a company online that has that name so you're very confused. Now you're racking your brain filling your how what was that fifteen dollars or you know fifty dollars for whatever so 59.99 or whatever. So level one data is the basic data the credit card transaction will go through but it doesn't tell you a whole lot about what the transaction was. Level two and level three day you know is more enhanced data about the transaction and credit cards that are for businesses corporations also what's called purchasing cards these type of cards. It's not the type of card that you or you or I would use Nathaniel when we're going out shopping or what your wife would use. It's the type of card that corporations would use. Businesses would use these cards. They are especially designed to accept more data about the transaction so level two data will accept information about how much sales tax was charged for this transaction what was the PO number for that transaction that's level two data. And then level three data would even contain information that goes into every single line item of an invoice so you know just imagine that the line items and invoice are replicated and sent to the credit card Clearing House and to Visa and MasterCard and then they're passed on to you back to you as the cardholder so it's very information-rich. It tells you a lot about the transaction. But these are only done in a business-to-business type of transaction when you can tell that from all of that rich data if you are the cardholder and you see all this extra information you know you could be purchasing thousands and thousands of transactions as a business provides there. Data is very important because if all you have is date name of merchants and dollar amount it's pretty darn hard to tell what you what it was for right? Especially if there's no correlation to the name of the merchants. NATHANIEL: So I want to dig some more into that but I just a question like thinking about my own credit card statement so and even a little bit of more what I've thought of as level one so some gateways and processor support a statement descriptor. The statement descriptor I mean that's kind of customization of the merchant name sometimes it's broken up into a few pieces so that would be one piece of metadata. And then the other would be a lot of times when I'd go and look at my credit card statement I get sort of industry, like this was a travel purchase or this was a retail purchase or this was a fuel purchase. Where would those fit and metadata? WADE: That would be more like level 2 data but not the complete like level 3 data so you're right but you also may want to check what type of if that's you like your personal credit card or was that from your business. NATHANIEL: That was my personal credit card so I find it's not always accurate either sometimes it's like know I bought something in retail and that's showing up as right but the credit card company seems to be at least trying to show me you know industry information. WADE: Consumer card definitely has limitations as to how much data it can capture and pass on that is that is a big difference. NATHANIEL: You've kind of touched on this but what types of businesses and particularly think of the merchant side not the not the using business side but the merchant side that's being purchased from. What time some types of businesses does level 2 and level 3 data make the most sense for? WADE: So the types of business that would make the most sense are businesses that are selling to other businesses so we like we always refer to it as B2B business to business type of enterprises. So it's not the restaurant retail traditional like retail businesses where it's like consumers going in and buying. It is more the business-to-business transactions and so again enterprise that are selling to other businesses and Casey kind of referred to it in his introduction but I mean the really exciting and fun part for us and where the impact of all this is when the seller or the merchant as you refer to them as we refer to them as an industry, when they provide this extra level 3 data it substantially lowers the fees that they pay the Visa Mastercard fees that they pay into the banking industry by you know close to 1%. You can imagine like million dollars worth of transactions over the course of a month or even a day. So it's not uncommon I have we just had a conference with a few of our clients and potential clients a presidential forum event and you know one of our clients they're saving like $400,000 a year in fees just because we move them over to this level 3 but it's not uncommon to save $100,000 a year I mean so this is like real money and this is real money that they can take home to the bank and it's you know the internal processes haven't changed. I think Casey's later can talk to from a IT perspective how that happens right. NATHANIEL: I guess what I'd be really curious about so I imagine b2b like you know large purchase orders etc but one thing that I've had some exposure to is it seems like some travel companies like companies that you would think of a like you know a salesperson or executive expensing things. So there's some sort of consumer slash business crossover companies where this can make sense I mean it would. WADE: I mean at the end of the day like a merchant or a seller you could have some merchants or sellers like you're saying travel related companies that are actually like a mix their business to business and their consumer so what they end up doing is they from when they're processing a credit card transaction they're really going to send level-3 data they're going to try to send the full level-3 data for every transaction¬† because they really don't know at the other end of the phone or at the other end of the cash register is the person going to use a corporate card or is the person holding a consumer credit card. So really they're going to set up their systems so that they're passing level-3 data this extra data metadata for every single transaction it's just at the financial benefit for the merchant or seller is is going to be to save money on their fees if that card was a corporate card or purchasing card. They're not going to save any money if it was a consumer credit card so I mean. You were asking from the merchants or seller's perspective that's kind of the big that's really the impact for the merchant or seller you know is the bottom line and saving money on their fees. Because if you were to ask a lot of merchants what is your number what is one of your biggest line item expenses on the P&L and you know after rent and labor cost credit card processing fees is often one of the biggest line items. We have also a lot of associations that are clients of ours and it's a big piece of their P&L. NATHANIEL: So we've touched on a few times obviously y'all are making a great business here so there must be ROI but how is that ROI work out you know when you think about tactical implementations you think about legacy payment systems you know Casey maybe you can talk a little bit just to what are the difficulties what are the paths to actually an organization being able to implement this? CASEY: First I mean let's just assume that we get past whether they can actually save money whether the company collects enough from these payment cards and gets significant savings and that's something that we could determine fairly quickly what we did need to do is we need to see does their gateway support it and in many cases know so they would have to be willing to move to a gateway that supports level 3 payment. And that sometimes can be a bit of a hurdle a lot of accounting departments really don't like that idea and they also sometimes they have multiple systems that come into that gateway and then we have to look once if they're willing to change their gateway or if they have a gateway that supports level 3 payment. We have to look at the systems that they use and this is this could be very cumbersome sometimes we get lucky and that they're collecting payments just over the phone and they have huge volume that way not necessarily the most secure but the easiest for us to implement the next step is that they have automated systems that collect payment are those systems designed to be able to provide level 3? And in general the answer is no and it's I mean when I was designing systems for doing stuff like that I wasn't thinking at that time when I was abstracting out the payment model that I should provide the payment processor line item details of an invoice. So at that point really what you what most systems do is that they really just associate the transaction idea that they get from the payment processor back to the accounting system. So they have that level of just details so they could find out and trace the transactions but that's nowhere near what needs to happen now so we have to see if there's ways to get the system to change cost effectively into something that can supplement the level 3 data and it really depends on the system and on top of it depends on the gateway because furthermore the gateways collect level-3 payment data differently. I Paytrace which has a beautiful API that supports level 3 data allows you to supplement level 3 data up to 24 hours pass the transaction. Whereas other systems you have to be able to provide it at auth and capture some systems are off or capture and the devil really is in the details. And what we try to do is we try to find a solution for a particular combination of systems and then try to find customers that that's did that fit that mold yeah and speedily supports level 3 payment. NATHANIEL: Yes well I mean I think it's really interesting right because one of the things we find one of the reasons that Spreedly often engages with customers is various reasons they need to work with multiple gateways or they want to shift to being able to interact with one gateway and be able to flexibly swap out that what that gateway is and I'd be curious actually if you have any companies I mean we were talking about companies for instance that do both consumer and business transactions. Do you have any companies that specifically route at level 3 business transactions into one back end and then route their consumer transactions into another package? CASEY: There's really no need for that we could do it like if if it was really necessary but I can't think of a use case as to why that would be necessary because what happens is that the if you send level 3 data to consumer credit card it's just ignored right? It doesn't hurt anything. NATHANIEL: I was thinking more around they had lots of consumer volume for instance and they're looking to shift they want to just move the level 3 stuff onto a gateway that actually supports it. So maybe that leads to my next question that would be you know how many gateways out there actually do support level 3 metadata in a way that you all actually find useful to implement I mean is it 10% of gateways is it 20% how like how does that break down? WADE: I'd say that number is growing Nathaniel but 10% maybe to 20% tops really so and there's literally hundreds of different payment gateways or payment software products out there. Spreedly would know because you guys connect in you know over a hundred of them so it's really incredible how many options that that the merchants have to choose from. It does create like a lot of confusion because not all of those gateways are created equal so so I guess that's that is where we come in. Is you know we look at the landscape of here's all these payment gateways out there within Spreedly there's a hundred of them plus for them to choose but really if they're in this b2b space out of those hundred there's only you know less than ten percent that they really should be looking at (for Level 2 and Level 3). And the other ninety percent some of which are very common named gateways a b2b enterprise should not even consider some of the more common payment ways even though it well-known in kind of a trusted name let's say it may not be designed for business-to-business transactions because they're not certified to pass this level three data on to Visa and MasterCard into the clearinghouses like First Data or TSYS or Paymentech. NATHANIEL: There's this other topic that I'm really curious about and that is you know you think about this we're talking about a lot of data potentially a pretty detailed financial data that's potentially being used in financial reconciliation I would love to understand just real high level who gets yelled at if this data is wrong? Like how does it who finds out that it's wrong how does it get corrected who has penalties if it's incorrect etc? WADE: Good question I mean there's generally no penalties if the data is incorrect except I should make an exception we have seen cases where merchants are providing data in the sales tax field so they might put sales tax information into a sales tax field when in fact there was no sales tax charged. Or where the buyer was sales tax exempt so for example we have we have we have quite a few we have dozens of government contractors companies that sell to the federal government as you know if you're selling to the federal government the federal government is not going to pay one iota nickel or penny of sales tax okay? And if they believe that you are charging them sales tax you know you're in big trouble. So if for any reason like you have you're sending data that might be putting in like a sales tax information into the field when in fact you know there was no sales tax. I mean then the then the cardholder would think that they're being charged sales tax or the data that's coming back would indicate that there's some sales tax in the amount of the total charge and that would lead to some problems you know especially in a federal government type of situation. But generally you know there's no real implication if there's something that's let's say incorrect or not completely accurate. However, if there is like missing data out of the level three fields then it would cause the transaction to have a higher fee associated and so you don't benefit from the approximately one percent savings and in credit card fees. NATHANIEL: So it sounds like what prevents say a merchant who is eager for the discount but not eager for the work from just stuffing random data into the level three fields is really the fact that if that happens the customer they're selling to is going to come back and yell at them because they're passing bogus level-3 data. But it's not really the credit card network that's going to get that they're going to get in trouble with? WADE: That's correct that's what I've seen. NATHANIEL: It's fascinating right because so much of how payments works has everything to do with risk and liability and who's actually culpable and responsible for different things so I always find an interest and you have these technical implementations but there's all this business you know machinations and who's responsible and who holds the bucks stuff. So the final question like to kind of wrap this all up together the final question I have for you is say I'm a merchant and I have some b2b sales and I have some maybe I have some b2c sales or maybe I don't but my volumes are growing you know I have a gateway out there if you have a few software engineers around or I have some cash I can go and spend with with some folks like you. How do I know when like what are the triggers to go and look at this problem when is it worthwhile for a business what should what indicators should I be looking at as a business to go and say we need to go and look at you know l-3 data because I must I'm assuming it's not something when you're two-person startup you really want to its really worth worrying about when does it when does it become an issue and what should folks be watching for you? WADE: Good question so I think you know when you start to see obviously for a two-person startup company it's not going to be relevant. I mean a company that starts to see like a volume of would stay anywhere a hundred thousand dollars of credit card sales per month so let's say a million dollars annually of credit card sales or more you're going to want to start looking at how can I really save on the credit card fees because now you're starting to you pay a lot of money I mean a million dollars maybe a little bit even low. But let's say three to five million dollars per year annual credit card receipts you're going to want to start looking at how you're going to how you want to save if you start to see that. Or if you're doing a lot of business to business transaction you're going to want to have you know an expert like us take a look at one or two months of your merchant statements the monthly statements that they get that itemized how much they're paying in fees and we can tell from looking those statements if they're doing level three processing or not we can you know. In nine out of ten cases quantify pretty darn accurately down to the last you know penny how much they're going to save if they do convert to level three data. and then that's where the Caseys of the world come in to help them with API integration identifying what payment gateways the right one to move to in order to be able to do the level three data. And in in many cases I mean the cost the cost is really not that much to implement for them with this level three so it sounds a lot more complicated than it actually really is. I have a lot of clients that tell me because we've been talking to them for one year two years about doing this they after we've implemented in they be coming back to me and saying Wade you know I'm so sorry way that we didn't do this a year ago or two years ago when you first approached us you know you know it works it works so well and it's flawless and you know it's exactly how you said it was going to be able to promise and I wish but you know and you're like well. NATHANIEL: I mean I can only tell you were only hurting yourself everybody has to learn from their own experience right. CASEY: I would I would like to add to that a great time from scheduling in order to think about implementing level three payments is when you're transitioning from legacy systems mmm that's our biggest problem it's the legacy systems that were made ten years ago and where we have companies that are now looking into getting a more privatized solution or off-the shelf and we can work with those easier because they're often more modular and a lot of them are now starting to support level 3. NATHANIEL: And I would think any kind of transition point like that obviously when things are already in flux and changing you know especially since it sounds like pretty straightforward implementation it could make a lot of sense versus having to spin up a whole organizational change cycle wait for wait for one happen and then and then get it in there no that's Great, so I really appreciate y'all's time I definitely learned some stuff. Now I'm thinking hmm do we need to go and look at this really need to go and look at whether we should be passing Level 3 metadata so well done and I'm sure a lot of other folks watching this are going to be asking themselves the same question really appreciate having you guys on and what I think everyone who's watching this and following along with these Payment Dialogs.