The Complete Guide to B2B Payment Processing
Business-to-business (B2B) transactions have been around forever, but with the dramatic increase in credit card usage by corporations, they’ve also become a lot more complicated to deal with for merchants who process them. Traditionally, businesses made their purchases by placing an order in person, through the mail, or over the telephone. The merchant would then ship the products and send the business a paper invoice for payment. They would then wait – sometimes for weeks – for payment to arrive in the form of a paper check. Cashing the check and receiving funds added several more days to the process.
With the advent of the internet, B2B transactions can now be received and processed in very little time. Specialized credit cards designed for small businesses and larger corporations allow nearly instantaneous payments, but also cost more to process than the old paper invoice method. For most merchants, the ability to bring the delay in receiving funds down to just 1-2 business days more than makes up for the extra expense. Accepting credit cards for B2B transactions also leads to a significant increase in overall sales, as more and more companies use credit cards exclusively for their business purchases.
While B2B credit card processing has a reputation for being expensive, you can actually save a very significant amount of money on your processing costs – if you know how to take advantage of the lower interchange rates available to B2B merchants. In this article, we’ll walk you through the basics of B2B processing and show you how you can save hundreds – or possibly even thousands – of dollars in processing costs by properly establishing yourself as a B2B merchant and taking advantage of the discounted rates offered by the major credit card associations.
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Table of Contents
What Are B2B Transactions?
A B2B transaction is simply a transaction where the customer is another business rather than an individual consumer. The transaction may involve goods, services, or a combination of both. You’ll also hear the term B2G (business-to-government) transaction, which describes transactions between a business and a local, state, or Federal government agency.
The most obvious example of a B2B transaction is when a company purchases supplies for its operations. However, many other types of transactions can also be classified as B2B transactions. For example, when a company hosts a luncheon for employees at a restaurant and uses a business credit card to pay for it, this would be a B2B transaction. The business making a B2B purchase can be anything from a large corporation to a solo freelancer using a business credit card to keep business and personal expenses separate.
In establishing a strategy for dealing with B2B transactions, the most important thing to consider is the percentage of B2B purchases your business expects to experience. Some businesses sell almost exclusively to individual consumers, and see very few, if any, B2B transactions. At the opposite end of the spectrum are businesses that sell almost exclusively to other businesses and make few direct sales to consumers. Most businesses, however, will fall somewhere in the middle, with B2B transactions making up a small, but significant percentage of their overall transactions. As we’ll see below, B2B transactions can entitle you to lower interchange costs and lower overall processing costs. However, you’ll have to jump through several hoops to establish yourself as a B2B merchant, and the specialized software you’ll need to take advantage of those lower rates isn’t free. You’ll want to evaluate very carefully whether it’s cost-effective to add specialized B2B processing services to your merchant account.
Merchant Category Codes (MCC Codes)
Merchant Category Codes (or MCC codes) are assigned by the credit card associations to classify businesses according to the products and services they provide. Before you can take advantage of the lower interchange rates available for B2B transactions, you’ll need to be assigned an MCC code that identifies you as a B2B merchant.
Unfortunately, all the major credit card associations have their own set of MCC codes, and they all treat them differently when it comes to B2B transactions. Visa, for example, will offer you a discounted interchange rate on B2B transactions if you’re assigned a qualifying MCC code and meet certain other criteria. MasterCard also uses MCC codes, but doesn’t offer a discount for B2B transactions.
Because each card association uses its own set of MCC codes, your business will end up with a separate code for each type of credit card you accept. Establishing the proper MCC code for your business is ultimately up to the credit card associations, although your merchant services provider can assist with this task to make sure you’re assigned an appropriate code.
Here’s a list of MCC Codes recognized by Visa as qualifying for B2B merchant status:
- Accounting, Auditing, and Bookkeeping Services (MCC 8931)
- Advertising Services (MCC 7311)
- Books, Periodicals, and Newspapers (MCC 5192)
- Business Services (MCC 7399)
- Chemicals and Allied Products (MCC 5169)
- Cleaning, Maintenance, and Janitorial Services (MCC 7349)
- Commercial Equipment (MCC 5046)
- Commercial Footwear (MCC 5139)
- Commercial Photography, Art, and Graphics (MCC 7333)
- Computer Maintenance, Repair, and Services (MCC 7379)
- Computer Programming, Data Processing, and Integrated Systems Design Services (MCC 7372)
- Construction Materials (MCC 5039)
- Durable Goods (MCC 5099)
- Electrical Parts and Equipment (MCC 5065)
- Employment Agencies and Temporary Help Services (MCC 7361)
- Florist Supplies, Nursery Stock and Flowers (MCC 5193)
- Industrial Supplies (MCC 5085)
- Information Retrieval Services (MCC 7375)
- Insurance Sales, Underwriting, and Premiums (MCC 6300)
- Landscaping and Horticultural Services (MCC 0780)
- Management, Consulting, and Public Relations Services (MCC 7392)
- Medical, Dental, Ophthalmic and Hospital Equipment and Supplies (MCC 5047)
- Men’s, Women’s, and Children’s Uniforms and Commercial Clothing (MCC 5137)
- Metal Service Centers and Offices (MCC 5051)
- Miscellaneous Publishing and Printing (MCC 2741)
- Motion Picture and Video Tape Production and Distribution(MCC 7829)
- Motor Freight Carriers and Trucking (MCC 4214)
- Nondurable Goods (MCC 5199)
- Office and Commercial Furniture (MCC 5021)
- Paints, Varnishes, and Supplies (MCC 5198)
- Photographic, Photocopy, Microfilm Equipment and Software (MCC 5044)
- Piece Goods, Notions, and Other Dry Goods (MCC 5131)
- Plumbing and Heating Equipment and Supplies (MCC 5074)
- Professional Services (MCC 8999)
- Special Trade Contractors (MCC 1799)
- Specialty Cleaning, Polishing and Sanitation Preparations (MCC 2842)
- Testing Laboratories (Non-Medical Testing) (MCC 8734)
- Typesetting, Plate Making and Related Services (MCC 2791)
Note that these codes only apply to Visa. MasterCard, American Express, and Discovery use their own separate sets of codes. Also, having an appropriate MCC code to qualify as a B2B merchant doesn’t automatically qualify you for discounted interchange rates on B2B transactions. You’ll also have to submit Level II (and possibly Level III) credit card data, as explained below.
Data Levels
In addition to being a properly-coded B2B merchant, you’ll need to submit additional payment data with each B2B transaction to be eligible for discounted processing rates. Credit card associations recognize three levels of payment data: Level I, Level II, and Level III data. Once again, the major credit card associations have their own separate ways of classifying and treating this data. Visa, for example, refers to these three data categories as “data levels,” while MasterCard calls them “data rates.”
For standard transactions between your business and individual consumers, only Level I data is required to process a transaction. Level II and III data is not submitted, and won’t get you a discount on interchange rates anyway. Because most businesses primarily sell to individuals rather than other businesses, your merchant account will only be set up to handle Level I data unless you add a service to record and transmit Level II and Level III data. Since most businesses won’t need this service, it’s often only available as an optional upgrade, and you’ll usually be charged an additional monthly fee for it. If your business only processes a small number of B2B transactions, you’ll want to weigh carefully whether the discounted interchange rates are worth this added expense. Remember, you’ll be paying the additional fee for Level II/III processing every month regardless of whether you use it regularly or not.
Processing of Level II and III data is further complicated by the fact that once again, the credit card associations have separate policies for handling this additional data. Discover, for example, only handles Level I data and won’t give you any discount on interchange rates for submitting Level II or III data. American Express, on the other hand, accepts both Level I and II data, but not Level III data. Acceptance of Level II data also requires prior approval for your business directly from American Express. Visa and MasterCard have the most liberal policies, accepting all three levels of credit card data without the need for prior approval. Note that you will still need to be properly coded with a Merchant Category Code identifying you as a B2B merchant.
So, just what “data” is included in these various data levels, anyway? Think of transaction processing data as a very large database, with each transaction being a record, and each record consisting of several fields that have to be filled in. All transactions will have to include all required fields for Level I data before they can be approved and processed. Level II and III data require additional fields that have to be filled in for the transaction to be processed as a Level II or III transaction and qualify for a lower interchange rate. Again, there are some slight variations in the data requirements among the various credit card associations. Here’s an overview of the common data requirements for each data level:
Level I data is required for all transactions, B2B or otherwise, and generally includes the following fields:
- Merchant DBA name
- Transaction amount
- Billing zip code
Level II data includes all Level I data, and the following additional fields:
- Sales tax amount
- Customer code
- Merchant postal code
- Merchant tax identification number
- Invoice number
- Order number
Level III data includes all Level I and Level II data, plus the following additional fields:
- Product commodity code
- Item ID or SKU
- Item description
- Unit price
- Quantity
- Unit of measure (each)
- Extended price
- Line discount
As you can see, entering Level III data requires a lot of additional data for each transaction. Unfortunately, manually entering this data on a standard countertop credit card terminal is not an easy process. If you’re using a virtual terminal or a payment gateway, it’s a little easier since you’ll have access to a full alphanumeric keyboard. Some merchant services providers can also set you up with a specialized software load for your terminal that automatically captures the required data, but you’ll have to pay extra for it. The bottom line is that manually entering Level II and III data is only a practical option for merchants who only handle the occasional B2B transaction and for whom specialized B2B processing software would not be cost-effective.
B2B Processing Rate Discounts
As we’ve noted above, including Level II and III data when processing a B2B transaction can save you money on processing costs by lowering the interchange rate that you have to pay to the credit card associations for each transaction. How significant are these savings? Perhaps more importantly, are they significant enough to offset the cost of paying for an additional B2B processing service for your merchant account?
To answer these questions, you’ll have to understand interchange fees and how they impact your overall costs for credit card processing. Interchange fees are the fees you’ll have to pay to the credit card association for each transaction. You’ll also have to pay an additional markup to your processor, but in most cases, the interchange fee will constitute a majority of your overall transaction processing cost. For a more in-depth explanation of interchange fees, check out our article Interchange Reimbursement: What You Need to Know About Your Most Costly Merchant Account Fee.
Each credit card association has its own set of interchange fees that apply to a variety of transactions. For our example, we’ll be using the 2018 Visa USA Interchange Reimbursement Fees schedule. You can find similar fee schedules online for the other major credit card associations. Be aware that these fee schedules are frequently updated – usually because the credit card associations have raised their rates. Here’s an extract from Visa’s current interchange fee schedule that applies to B2B transactions:
As you can see, a standard Commercial Card-Present transaction made on a business credit card will incur an interchange fee of 2.50% + $0.10 per transaction. However, if you include Level III data when submitting the transaction, the interchange fee drops to 1.90% + $0.10 per transaction. That’s a savings of 0.60%, and even larger savings are possible for other types of B2B transactions. While this may not sound like a significant amount of money, it can really add up quickly, particularly if your business processes a lot of B2B transactions.
Here’s an example of how these savings work. Let’s say you have a single B2B transaction for $1,000. If you only include the Level I data, you’ll pay $25.10 in interchange fees alone. Your actual processing costs will be even higher once you pay whatever markup your processor charges you. For the same transaction, including Level III processing data reduces your interchange fees to $19.10. While that $6.00 savings might not seem like much, it can really add up in a hurry if a significant number of your transactions are B2B.
Large-ticket transactions are common in the B2B world, and the inclusion of Level III data will result in a very significant savings on interchange fees if your transaction amount is large enough to qualify. In the extract above, you’ll see that a Commercial Product Large Ticket transaction incurs an interchange fee of 1.45% + $35.00 per transaction. This special large-ticket rate only applies to single transactions over $6,500.
Given the hefty $35.00 per transaction charge, you might understandably be skeptical that this “special” rate will save you any money. So, let’s do the math. A transaction for $6,500.01 – barely large enough to qualify – would incur an interchange fee of $162.60 if processed at the standard Commercial Card-Present rate of 2.50% + $0.10. However, under the Commercial Product Large Ticket rate of 1.45% + $35.00 your interchange fee would only be $129.75. That’s a savings of $32.85. At the same time, the same transaction would only cost $123.60 under the Commercial Level III rate of 1.90% + $0.10. The break-even point between the Commercial Product Large Ticket rate and the Commercial Level III rate occurs at $7,758.50. Thus, for any transaction over this amount, the Commercial Product Large Ticket rate will actually save you money in interchange costs. Remember in comparing these rates that the markup you pay to your processor under an interchange-plus pricing plan will add to your overall processing costs, but it will be the same regardless of whether the transaction is B2B or not, and regardless of the ticket size.
How Processing Rate Plans Affect B2B Processing
If your head is spinning a little by now, we understand. There are a lot of variables involved in comparing B2B processing rates against standard business-to-consumer rates. There is, however, one simple and very important point that you need to understand: B2B processing rates will only save you money if you have an interchange-plus or subscription-based pricing plan. With an interchange-plus pricing plan, you pay the applicable interchange rate plus a fixed markup (usually a percentage of the transaction plus a small per-transaction fee) that goes to your merchant services provider. Subscription-based (or membership) pricing plans modify this arrangement by offering much lower per-transaction costs in exchange for a higher monthly subscription fee. One of our favorite providers, Fattmerchant (see our review) only charges a low per-transaction fee with a 0% markup (although their $99 per month subscription fee might not be cost-effective for low-volume businesses). Interchange-plus and subscription-based pricing plans pass the interchange costs directly onto you with a fixed markup. If the interchange costs go down due to using Level III data for B2B transactions, this lower rate is also passed on, meaning you save money.
Unfortunately, the same cannot be said for flat-rate or tiered pricing plans. Providers such as Square (see our review) will charge you a flat rate for each transaction regardless of the underlying interchange fee. As a result, you won’t see any savings on B2B transactions with Level III data. In fact, if such a transaction does result in a lower interchange fee, your provider gets to keep the savings. Tiered pricing works the same way, with transactions being processed according to fixed rates based on whether a transaction falls under a qualified, mid-qualified, or non-qualified tier. Since these tiers are designed to ensure that the processor makes a profit from each transaction regardless of the underlying interchange rate, you won’t see any decrease in processing costs by using Level III data for B2B transactions. In fact, your processor will get to keep whatever savings result from using Level III data. While we strongly recommend against tiered plans for all merchants, it’s doubly important to avoid them if your business processes a lot of B2B transactions.
B2B Software Applications
As we’ve discussed above, you can save a significant amount of money on processing B2B transactions by including Level III data and ensuring that you have the proper MCC code identifying you as a B2B merchant. However, a standard merchant account designed for business-to-consumer transactions won’t include these features. You’ll have to pay extra for them, and every merchant services provider approaches the problem of serving B2B merchants differently.
While including Level III data can be as simple as installing a special software load on your credit card terminal, merchant services providers are increasingly turning to computer- and web-based software to help B2B merchants get the lower rates to which they’re entitled. A notable trend we’re seeing in the merchant services industry is the switch to integrated processing software that allows merchants to process both retail and online transactions using the same platform. With an integrated payments platform, it’s easy to include B2B processing capability as an option for merchants who need it.
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One of the better-integrated services we’ve seen is the MX Merchant platform offered by Dharma Merchant Services (see our review), one of our favorite providers. By adding the optional MX B2B app, B2B merchants can have Level III data automatically populated whenever they submit a B2B transaction. While the app costs an additional $20.00 per month, it can more than pay for itself if you process even a single large-ticket B2B transaction at the lower interchange rates.
Most other merchant services providers will also charge you an additional monthly fee for submitting Level II or III data. While these fees vary, $20.00 per month seems to be the industry average. If you only rarely process B2B transactions and they aren’t for large amounts, this extra service might not be cost-effective. On the other hand, any merchant who processes a significant amount of B2B transactions – particularly large-ticket ones – should realize a net savings by including this feature in their merchant account.
Final Thoughts
If you’ve ever tried to input Level III data on a countertop terminal manually, you’ve probably gotten frustrated and given up on inputting all the required data needed to qualify for a lower interchange rate. You’ve probably also overpaid for processing that transaction. Yes, the world of B2B processing can seem very confusing at first. However, it’s really not all that complicated. Your merchant services provider can help ensure you’re properly coded as a B2B merchant and that your payment processing systems (i.e., terminals, POS systems, virtual terminals, and payment gateways) are set up to include Level III processing data. Whether you want to invest the money into additional B2B services will depend on your overall B2B transaction volume.
For merchants who only see a B2B transaction on rare occasions, it might not be worth the extra monthly fee for a service you’re rarely going to use. In such cases, using a payment gateway or virtual terminal will make it much easier to enter the required Level III data manually. Merchants who process a significant amount of B2B transactions, on the other hand, will save far more money in lower interchange rates than the cost of the additional B2B software. If you can save more than the usual $20 monthly fee for B2B services, we highly recommend that you include this feature when setting up your merchant account. Your merchant services provider should be able to help you get this option set up and running smoothly.
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Frank Kehl
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