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Street Smarts:
Taking It To The Next 'Level'

By Ed Freedman

The most recent "Street Smarts" series focused on new offerings that MLSs can add to their tool bag for achieving maximum revenue success and merchant satisfaction. We reviewed value-added products and services such as check conversion, gift and loyalty cards, wireless products and Internet-based services, and we looked at their respective benefits and optimum selling approaches.

In our continued commitment this year to learning new solutions to sell, let's explore taking our business to the next 'level'-namely, Level-3 processing.

Any merchant accepting government or corporate purchase cards and MasterCard business cards requires Level-3 (or Level III) processing (a purchase card allows employees to make purchases related to the business).

These merchants provide goods and services mainly in the business-to-business (B2B) marketplace, and they include maintenance, repair and operating (MRO) suppliers, IT vendors, attorneys, machine shops, fleet suppliers and electrical equipment dealers.

Many of these merchants get requests from their customers to supply specialized data. How many merchants? Consider this statistic: Level-3 processing service provider GSA SmartPay's Federal purchase card program had $18 billion in activity in 2003.

Level-3 processing differs from Level-1 and Level-2 processing in that Level-3 is a data addendum that incorporates Level-1 and Level-2 information and adds invoice level and line item details to run with MasterCard or Visa transactions. Purchase card issuers provide electronic statement tools to cardholders in order to review these transactions.

In simple terms, Level-1 includes basic consumer-grade information-what you'd get with a knuckle buster or basic terminal-including merchant name and address, cardholder name and account number, expiration date and transaction amount.

Level-2 data, the first business card enhancement addendum, includes sales tax, freight and customer codes. Level-3 data include information such as quantity, unit of measure, item ID, item description, commodity code, unit price and extended price.

Both MasterCard and Visa's interchange rates and fees for Level-3 data processing (as of April 2004) offer substantial savings:

  • MasterCard's Corporate Data III rate (applies to business cards and purchase cards) is 1.65% + assessments
  • Visa's Commercial Level III Data rate (new category) is 1.70% + $0.10
  • Visa's Purchasing Large Ticket rate for transactions over $5,000 (requires Level-3 data for qualification) is 0.95% + $35
  • MasterCard's Corporate Large Ticket rate is 1.20% + $40
If the required data are not processed, or 'passed,' then the transactions are usually downgraded to a "non-qualified" status. From an interchange cost standpoint, these transactions downgrade to a Corporate, or Commercial, standard rate of 2.70% + $0.10 for both MasterCard and Visa, respectively.

MasterCard's Corporate Data Rate II is 1.95% + 0.00, and Visa's Commercial Level II Data rate is 1.90% + $0.10.

Whether the transactions are MasterCard or Visa, you still need to set up a merchant with either a small ticket or large ticket program.

A typical Level-3 transaction is handled in the following way: First, merchants must have a processing tool that transmits Level-3 data into the credit card system. The tool can be a Web-based virtual terminal such as 3Delta Systems, Inc.'s EC-Zone; it can be PC-based, such as Global Payments Inc.'s Retail @dvantage PC; it can also be a system-to-system product such as 3Delta's EC-Linx and EC-Batch, which receive information from order entry or enterprise accounting systems.

For SSL providers such as 3Delta, authorization time is similar to any MasterCard or Visa transaction-with response times in the range of two to three seconds. PC-based products generally use a dial-up modem for authorization and are somewhat slower.

The Level-3 data are appended to the settlement record and forwarded to the merchant processor-this is where initial interchange qualification occurs. The transaction is forwarded to the association, then to the issuer's processor-usually TSYS or EDS-and then to the issuer to make it available for its e-statement system.

It generally takes a couple of days for the transaction to be available on the e-statement versus the monthly cycle used by consumers. Account holders still get paper statements, but the statements contain only Level-1 and Level-2 data, and of course, they are considerably behind the e-statements.

When did I become such an expert on Level 3? After I had the opportunity to speak with Rick Ricker, Director of Operations for 3Delta, a Level-3 service provider.

Ricker said MLSs not only need to understand how a Level-3 transaction works, but they should also know how a Level-3 type merchant operates. These merchants are often more sophisticated and require a longer sales cycle than regular retail merchants.

There are a limited number of processing platforms that can handle Level-3 transactions, and MLSs will need to have an agent relationship with one of them. The major players for MLS-centric sales channels are FDMS North and South platforms, Global Payments Inc., Vital Processing Services and NOVA Information Systems.

Ricker said application service providers (ASPs) such as 3Delta require no additional or distributed software so all that a merchant would need to start processing transactions are an Internet connection and a browser. PC-based applications usually require additional software, which requires installation and support.

3Delta, like many other gateway providers, is compliant with Visa's Cardholder Information Security Program (CISP) and MasterCard's Site Data Protection (SDP) program, while many of the distributed software products are not. Ricker said there are many advantages for MLSs selling Level-3 processing; one of these is product differentiation-the ability to offer a service not available everywhere. This level of processing provides MLSs with greater credibility by offering a product for more sophisticated merchants and making realistic proposals in instances when their competitors can't.

He said Level 3 is more like a "systems sale" than a terminal sale, both in terms of cycle time and/or acumen. Like all channels/market segments, it has its own language. But once learned, MLSs will find a teeming potential market that is vastly under-penetrated.

Ricker asked, "How many sales calls do you think a typical professional services firm gets that is doing government business and has zero retail presence?" The answer, "Next to none!"

This means there is less competition and margins can be a bit higher. Ricker suggested MLSs differentiate themselves on elements other than price. If MLSs continue to provide service, then their Level-3 merchants should stay around for a long time.

The other obvious benefit is revenue. Aside from regular account revenue, there are mark-ups possible on the gateway fees or software packages. Ricker said that B2B merchants usually have lower transaction counts, but much higher average tickets.

3Delta has experienced the common practice of its resellers offering an implementation package that has several thousands dollars of "IT consulting" or related fees-understanding that in many organizations, they will track card processing costs down to the last three basis points, then round their IT implementation costs to the nearest $5,000. What budget would you rather work with?

3Delta is uniquely qualified to service and support Level-3 processing. It provides three gateway interfaces called EC-Zone, EC-Linx and EC-Batch and offers small to mid-market merchants transaction processing on a subscription basis.

All sales are through resellers and ISOs to whom 3DSI provides sales support and customer consultation. 3Delta provides complete, person-to-person training on all its products and offers telephone support during business hours.

The company also hosts a specialized information portal ( that provides merchant and partner information about government purchase card use; there are some excellent general-purpose articles and information posted to the site, too.

I'm sure you're curious how many of your colleagues sell Level-3 processing. In order to get a definitive answer, I posted the following on The Green Sheet Online's MLS Forum:

"How many MLSs have merchants who accept government credit cards and are required to support Level-3 processing? What are the challenges you face in dealing with this specialized market? Are there opportunities and benefits for MLSs in working with Level-3 processing merchants?"

Here's how the street responded:

"The main problem I face is trying to explain to merchants they will need two accounts. One for the bigger transactions and one for the smaller transactions because the per transaction interchange price goes from cents to several dollars. It would seem there would be a way to include the correct interchange level on one account.

"Education is definitely lacking in the data rate avenue. I pretty much educated myself...this seems to be a stepchild of the industry. It would be nice if Visa would jump on the bandwagon and offer a better deal for the smaller under $5K purchase card transactions. Currently there is no lower interchange for those types of transactions." -Tazman

"The type of merchant that accepts government procurement cards is the easiest type of merchant to sign. They are not used to accepting credit cards in the normal scheme of their business. Therefore they will sign with you regardless of the fees just so they can meet the requirements of the client they are serving." -Steve Norell The processing of Level-3 data is a terrific niche market with great financial potential and hardly any competition. Why is there no competition? Most MLSs know nothing about this market, and they're afraid to approach merchants with these solutions. Most are not out there actively marketing to this group of merchants. There is a lot of processing potential here, and someone is going to get it. Will it be you?

First, I'd like to say that there's nothing to be afraid of. This is not complicated stuff. 3Delta's Level-2 and Level-3 processing data virtual terminal/gateway product is very similar to other virtual terminal/gateways you're already comfortable selling such as VeriSign, Plug'n Pay and Authorize.Net. The only difference is that a virtual terminal gives the user the ability to pass a significantly larger amount of data fields.

Total Merchant Services is a reseller of 3Delta's virtual terminals. We have set up many merchants and we've had no problems. From a pricing standpoint, it's similarly priced to other high-end virtual terminals (e.g. $50 setup cost, $20 monthly gateway fee and an extra $0.10 per transaction).

Now that I let the secret out, and you're thinking, "This is not that complicated! I want to go after this market," the next step is to figure out how to get started.

This is my advice to you:

Ask yourself the following questions: Who issues corporate procurement cards and government purchase cards? What banks issue them and which corporations use them?

For example, General Electric uses procurement cards. This means that all vendors billing them for, say, less than $30,000 must have a merchant account and pass Level-3 data to get paid. These companies have both new and existing vendors that are not set up yet. So, what do you need to do? Contact someone at these companies and get a list of new or non-compliant vendors so you can offer your assistance to get them set up and running.

Imagine you are now working with this list. How does your phone call sound? Like this: "I'm calling to inform you that General Electric will no longer be able to do business with you as of XYZ date if you are not set up with a merchant account that passes Level-3 data. I am calling to assist you in getting this type of a merchant account so you can get paid in a timely manner and continue to work as a compliant vendor with General Electric."

After this introduction, you should be off and running. If they're already set up, then you can talk about rates and the type of software they're using.

The bottom line-all you have to do is the legwork. Find companies or government agencies using these types of cards. Get their lists of new or non-compliant vendors and offer your assistance. Once you have that list, the rest really sells itself. For those of you who read this article and take action to earn some real money in this niche market, please make sure you drop me a line and let me know how this plan worked for you.

I'd like to take this opportunity to thank 3Delta Systems for their invaluable contributions to this column. My next column will discuss one of our more forward-moving MLS organizations-NAOPP. I'll report on what this group accomplished during its first year of service, how well it achieved its initial goals and what's planned for the coming year. Here's your chance to share your experience and opinion of NAOPP.

Look for my upcoming post on the MLS Forum. Or, send your comments on this and any other topic to . Thanks for your continued support and participation.

"It is not enough to have a good mind.
The main thing is to use it well."

-Rene Descartes

See you next time where the rubber meets the road.

Ed Freedman is founder and President/CEO of Total Merchant Services, one of the fastest-growing credit card merchant account acquirers in the nation. Ed is the driving force behind all business development activity as well as the execution of Total Merchant Services' marketing plan, including recruiting and training independent sales offices and establishing strategic alliance partnerships with leading vendors, so that Total Merchant Services can provide its customers with the highest quality and most reliable services available.

To learn more about Total Merchant Services, visit the Web site at To learn more about partnering with Total Merchant Services, visit or contact Ed directly at

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