Episode Transcript
[00:00:04] Speaker A: This is Payments Ground Game, where we go under the operational hood of payments isos. Let's take a deep dive into the tactics you can use to strategically scale performance and your bottom line.
All right, welcome to another episode of Payments Ground Game. Today we wanted to talk about some changes that are coming with visas level 2 and level 3 interchange programs. There are some pretty significant changes that have actually already happened and then are being phased in over the next several months.
But first, why don't we start with just talking about what level two and level three is, how it kind of came about, and how it's kind of transpired over time. So I'll let you start there, Kevin. Let's just break down the simple, you know, breakdown of what is level two and level three.
[00:00:57] Speaker B: So, you know, as things progress, we have companies that are doing business between each other, and we call those B2B payments business to business payments.
And as Visa was trying to get more and more companies to come into this, they decided that the best way to do that was they were going to provide if the merchant could provide enhanced data with the transaction, that would in turn lower the risk. They could, in turn, by taking that enhanced data and lowering the risk, they could reduce interchange. And they came up with basically two categories, Level two and level three.
Level two, taking only a few pieces of information to qualify to get the lower rate if it's transmitted with the transaction, and then level three being a much more enhanced, detailed version of that same type of transaction. But because of the enhanced detail associated with level three, it got even a lower cost associated with the interchange for that transaction.
So that's really how it started. It was really Visa's way to, you know, how do we start getting these large companies that pay things back and forth, like invoices and things like that, back and forth that are relatively large tickets. How do we get that into the ecosystem? And this was their. This is how they did it.
[00:02:13] Speaker A: Yeah, they were trying to change behavior. So they're trying to take companies who were paying by electronic payment or check and get them to accept card payments. And of course, there's a cost for card payments. So you have to make the argument, well, you're going to collect more quickly.
But that's not always a winning argument. It's kind of, you know, you have to build a process around it. So then I think the introduction of this program so that it costs you less and taking away some of that cost. So it's not like taking a consumer card, it's taking a business card where you Get a reduced interchange program.
And okay, now if we can accept the card more quickly and collect payment more quickly and have a reduced rate, does it start to make sense to have a payment acceptance method built around this? And I think we started to see that a lot of companies started to accept payments on cards that they didn't otherwise accept payments for.
But then what started to happen, which I don't know, that Visa saw this coming or not.
One of the criteria for level two and level three is like Kevin was saying that you have to populate all of these data elements, like tax rate, like invoice number.
And so what the gateways and some of the processors started doing is they started automatically populating these fields so that the merchants could qualify for those interchange rates.
But they're really sending garbage data. It's meaningless. It's not a real invoice number. It's not a real tax rate. They're just kind of guessing at the tax rate based on the geography of where the cardholder's located kind of thing.
It's kind of going against the intention of what Visa was trying to build with this by populating garbage data into these fields.
[00:04:00] Speaker B: Well, let's just be honest. What really happened was merchants complained because they had to put this extra information in. So we, as a business organization, I say we the industry, to make things simpler to comply and get these merchants the rates that they wanted without having to listen to them bitch as much decide, hey, I'll just put in junk data into these transactions so that, you know, on every time my merchant runs a transaction, it'll just fill in some junk data. Visa just sees that there's data there, they qualify for the enhanced rate, get the lower interchange. My merchant really doesn't have to do anything extra, and therefore the transaction will qualify.
The problem being, guys, is Visa set this up so that they have this extra data, and with that extra data, they. That transaction becomes a more secure transaction because you're providing this extra data.
Well, Visa quick is. It did. I wouldn't say they were quick to realize, but realize that, hey, a lot of this stuff is just. They're sending in junk data.
Junk data does not do anything to lower the risk of the transaction. Therefore, Visa has come back and said, hey, wait a minute, we've got a problem here, and we need to fix this. The problem is these transactions are not actually lower risk because the data that we needed to make them lower risk is not being presented. It's being presented. You're just throwing over garbage to us. So Visa has decided to make some changes because we weren't doing things correctly. And I say we, it's all of us. It's us in our industry trying to find a quick and easy solution, trying to quote, unquote, trick the system, so to speak.
[00:05:40] Speaker A: No, we wouldn't.
[00:05:43] Speaker B: Yes.
[00:05:45] Speaker A: So what we're referring to is called the Commercial Enhanced Data Program. You'll also see it referred to as cedp.
And I just want to walk through some of the changes because it's a phased approach. So they started with the first phase in April of 2025.
And maybe you haven't realized this yet, but they did introduce a five basis point assessment on all volume for level two and level three. So that is already in effect. So you might notice a little uptick in the cost of acceptance for those kinds of transactions. And that is because they have applied this assessment to all of those transactions, regardless of whether they're level two or level three. If they're either one of those things, everyone gets hit with that assessment.
Also as part of that phase, Visa started sending out reports to acquirers and sending them information. So what they're doing is they're gathering these reports and they send information and give examples of transactions that they're submitting level three information and there's errors with that information. So they're saying, hey, you submitted this this way. Now come the next phase, this is not going to qualify in this way.
So Acquirer should be working with merchants to help them comply in this time period. So we have a little bit of a leeway right now in time to be able to take this information, do something with it. So if we see people who are, you know, sending through garbage data, now's the time for them to start working on it so they can send, send, you know, adequate information and be able to comply under the new standards in the next phase.
[00:07:30] Speaker B: Alaina's trying to be nice. What they're doing is they're sending reports and we know they're sending the reports because we've gotten ours for the last two months from Visa. And Visa is saying, hey, look guys, here's the transactions that we're telling you. This looks like garbage data. You're not sending us anything. And they're, they're sending over the transaction with the merchant. They're saying, hey, these are what we believe to be incorrect with that, and you guys need to go get this fixed with the merchant. Whether that is putting in the correct ein number, putting in the correct tax rate for that particular region for that particular merchant, et Cetera, they're sending that over now to give us an opportunity to kind of clean ourselves up a little bit. I mean, God bless Visa. They're giving us a chance to go back and clean this stuff up.
[00:08:16] Speaker A: And I think the most common thing we see, correct me if I'm wrong, Kevin, is usually around the tax rate. That's kind of the most common error that we, we run into. Do you see any other ones frequently or is it mostly tax rates?
[00:08:27] Speaker B: No, it's mostly like the tax rates.
[00:08:29] Speaker A: Okay. All right. So the next phase of this program is that in October, Visa is going to implement its own proprietary CEDP algorithm and they are going to categorize merchants as verified or non verified based on their history and what they've submitted and whether they're submitting things that are accurate.
So they put them in these two buckets, verified or non verified. So if they're verified, they will be able to automatically participate in level three interchange programs.
If they're not verified, they have this what they call a lagged interchange process flow.
So they will get a lower interchange if they submit level three transactions and they're non verified. And then Visa is going to have this like, look back period where they go back and say, did they have all of the correct information?
No, they did not leave it in that lower qualification. Yes, they did. We're going to credit them back the interchange difference and give them, give them this difference in interchange category, which, if you have any involvement in anything to do with billing interchange calculations, truing up, reconciling, this kind of look back period and adjustment is really an absolute nightmare because you're never going to be accurate in what your actual cost was because you're always going to have this, you know, lag period rolling for you that things might be adjusted even though they've already happened.
So that's very difficult. I don't love that at all. As somebody who is involved in settlement, accounting and reconciliation and you think that.
[00:10:19] Speaker B: We have problems with merchants bitching about rates now, wait until you have to tell them, oh, you might get a better rate for that transaction 90 days from now.
[00:10:28] Speaker A: Yeah, we don't know. Well, it's not that bad. It's 10 to 15 days is the period that they said.
But still, if you're in the non verified bucket, I guess you're always wondering, like, am I going to, you know, qualify or not qualify? So I guess the moral of the story is if you want to do this, you have to do it well. You have to do it right. You Want to get into that verified category and not fall into this look back period so that you're constantly wondering what is my actual rate going to be? Because that's just. It's very hard for forecasting and planning purposes to do anything with that happening in the background.
[00:11:07] Speaker B: Now, I know you're saying 14 days, but I'm telling you guys, this is, nothing is going to be like that with the billing systems that are in place in our industry today.
[00:11:19] Speaker A: Yeah, no, that's just Visa's look back period.
Yeah, that's their look back periods. Then add on top of that the billing practices of the processor and how they're going to implement that. You know, when they see that something has been adjusted, how do then they go turn around and pass that on to the merchant and then residuals and the whole. I mean, it's just, this is a very messy nightmare. It's a whole messy thing. Okay, so then if that's not the worst of it.
[00:11:47] Speaker B: But hold on, wait a minute. You skipped over.
You're talking about level three.
Where's level two?
[00:11:55] Speaker A: So in April 2026, level two, as we know it is going to go away completely. And the only exception is fuel transactions, non fleet fuel transactions, I believe.
So there's a little remainder there. But level two, the other kinds of level two for commercial and small business is going to go away.
[00:12:17] Speaker B: But what does that mean?
That means that Level two, that most, some of your merchants have been receiving in the past and have been accustomed to receiving that interchange decrease associated with Level two are some of you, as a lot of people do, a lot of people leave that buffer in there and that becomes their margin when they're pricing these merchants, hey, that margin's going away. Those interchange categories are going away. Those transactions, instead of qualifying at, you know, roughly two and a half percent, they're gonna start qualifying at like 3.15%.
[00:12:50] Speaker A: That's a big bump.
[00:12:51] Speaker B: Big bump.
And as of right now, correct me if I'm wrong, Elena, there's not a proposal from Visa this point to reintroduce Level two at any point.
[00:13:01] Speaker A: No. Yeah. No, it's just they say, from what I read, they say level three will have expanded interchange programs. But I do think that it's going to be subject to all of the data requirements of, you know, Level three. So it's not going to be like an easier to qualify Level three. It, it just might look a little different, but it's going, the burden is going to be high.
[00:13:26] Speaker B: Let's talk a little bit about what is the difference between the qualific for level two and level three.
Level two, really all you need to qualify for level two is just to have the tax rate in there and the tax associated with the transaction.
[00:13:41] Speaker A: And an invoice number or no, and.
[00:13:43] Speaker B: I believe an invoice number. I think you're right. So it's like two additional pieces of data.
[00:13:47] Speaker A: Yeah, it's. If you look at a chart from level two to level three, it's like maybe three little checkboxes for level two and maybe two dozen checkboxes or level three.
[00:13:59] Speaker B: Level three starts getting into line item detail, line item itemization, line item, line item cost, line item. You know, you have to start getting into all the detail of what we would consider a B2B invoice. For example, if I'm buying fence stuff from a fence company, I bought 32 nails. Each nail is so much, it's going to give me a multiplier out, which is going to give me a total cost for the nails. And then I'm going to go to the next line item that's going to be plus planks. And there's 37 planks. And each plank is X amount. And the total for that is this. And then you have to go down and total all of that up and you have to transmit all of this additional data or it will not qualify for level three.
[00:14:45] Speaker A: So it's a big difference between the two. And I think that I'm not hearing a lot of people talking about this. I think some people are going to be blindsided because all of a sudden they're not going to qualify when they notice the new assessment. Five basis points is. I mean, it's significant, but it's small enough that if you're not really paying attention, you might not have noticed that that already happened.
But once it gets to the point where level two just goes away, that's going to.
I think there's going to be some shockwaves that kind of travel through because I don't think it's on radars right.
[00:15:26] Speaker B: Now, especially for those folks that really have built in Level 2, not as an enhanced reduction in interchange for their clients, but they built it in for themselves as like a, you know, if we can get the customer to do this, we'll get our interchange reduced and we'll get additional margin. All of a sudden, poof, margin goes.
[00:15:44] Speaker A: Away like a magic that happens. That's pretty common. I think a lot of people will kind of absorb those savings for themselves and not pass all of it on or Charge some kind of fee to be able to use it or charge basis points to be able to, you know, even facilitate the program.
So that margin for them is essentially, you know, going to disappear once this happens.
[00:16:09] Speaker B: And it's coming, whether we like it or not. It's coming.
[00:16:12] Speaker A: It's coming. Yeah. So again, if you want to learn more about this, it's called visas Commercial Enhanced Data Program. The acronym, like we have so many acronyms for so many things in this industry is cedp.
There is a bulletin or two that really gets into the details of this. So if you need to find out more, I'll try to link those in our show notes as well so that you can research it a bit more and maybe some articles that I found because it is really important to read all of the different angles on this and just fully understand how it's going to affect you. Whether you're a sales office out there selling to merchants who accept these kinds of transactions, whether you are a merchant yourself and run these kinds of transactions, whether you work for a processor or maybe a gateway that does some activities around these kinds of transactions, it's going to be pretty far reaching. So I would just encourage you to do as much research as you can and really understand how it's going to affect you.
[00:17:10] Speaker B: And if you do have level two merchants and your merchants are processing today and you are not receiving these reports from Visa or some sort of, you know, cut and paste from these reports to kind of go over what your merchants are doing right and what your merchants are doing wrong, you need to reach out to your processor and get that and get ahead of that.
[00:17:29] Speaker A: That's a great point because we're getting them and we're sharing them out with our sales offices who are then in turn going to their merchants and working through them. But if you're not, if, if someone's not sharing that information with you, you're really at a disadvantage because you need to have visibility into how things are not qualifying now so that you can fix it them and have time to fix them before things change.
