I get requests all of the time regarding how to determine an organization’s merchant level. Even though the card brand Web sites have this information posted, the questions still persist. But even with those tables and references such as this post, it is very important for all merchants to remember that the only entities that can definitively set a merchant’s level are the merchant’s processor(s), acquiring bank(s) or the card brands.
So, while what I am going to discuss in this post should provide the information necessary for most merchants to determine their merchant level, you cannot use this post as the definitive answer on this subject. This is only my opinion. Again, if you want a definitive answer, you need to get that from your processor(s), acquiring bank(s) or card brand(s). Also, before I forget, I have not included a discussion regarding vulnerability scanning, penetration testing and other requirements, so you will need to reference the card brand tables for those other requirements.
One would think that this issue is simple to resolve. After all, the card brands have this information posted on their Web sites. So, you just go to their Web sites and figure it out. Oh, if it were only that simple.
Card Brand Merchant Level Tables
The first problem most merchants run into is that Visa, MasterCard, Discover, American Express and JCB all have tables for merchant levels. Which leads to the first question merchants typically have; “Whose table should I use?”
The answer is you use the tables for only those card brands for which you have a merchant agreement. This sounds easy enough, but as we will see later on, might not be as simple as you might think.
Things can get even easier for some merchants. While Visa, MasterCard and Discover have their own table of merchant levels, if you compare them, you will note that Visa, MasterCard and Discover have gotten together and decided to use the same criteria for determining merchant levels. So, if the only credit cards you accept as a merchant are Visa, MasterCard and/or Discover, you only need to reference the Visa tables as their merchant level criteria are all the same. But for those merchants that accept American Express and/or JCB in addition to the other card brands, do not fret. The card brands have made things easy for you as well. If you are a given merchant level for any other card brand, you are that merchant level for every card brand. However, as we discuss the merchant level criteria, for merchants accepting American Express or JCB credit cards, smaller processing volumes of those cards can easily make you a Level 1 or 2 merchant.
With the exception of Merchant Level 3, transaction volumes are the total number of credit card transactions processed, regardless of whether those transactions are card present, card not present, e-Commerce, whatever. Level 3 merchants introduces the concept of e-commerce only transactions, but we will discuss this a bit later.
The Big, Bad, Ugly Level 1 Merchant
Level 1 merchants are the easiest to define and the ones that must go through the full Security Assessment Procedures and produce a Report On Compliance (ROC). If you are a merchant that meets any of the following annual transaction processing volumes, you are a Level 1 merchant to all of the card brands:
- Over six million Visa, MasterCard or Discover transactions
- Two and a half million or more American Express transactions
- Over one million JCB transactions
The first thing merchants that have big transaction volumes with American Express or JCB is that they can easily end up a Level 1 merchant with very few Visa, MasterCard or Discover transactions.
I Am A Level 2 Merchant, I Can Do A Self-Assessment Questionnaire
On the face of things, Level 2 merchants are also easy to define. If your organization meets any of the following annual transaction processing volumes, you are a Level 2 merchant to all of the card brands.
- One to six million Visa, MasterCard or Discover transactions
- 50,000 to two and a half million American Express transactions
- Less than one million JCB transactions
Where things get complicated for merchants is in regards to the credit cards they have agreed to accept, particularly JCB cards. It turns out that if you have agreed to accept Discover or Diners Club cards, you may also have inadvertently agreed to accept JCB cards. In the United States and some of Europe, Discover processes Diners Club and JCB transactions and your merchant agreement with Discover may have included JCB. Overseas, JCB processes for Discover and Diners Club in some countries. As a result, you will need to review your merchant agreement with your processor to make sure that JCB cards are not included in your agreement. If your merchant agreement does cover JCB cards, even if you have never processed a JCB transaction (mathematically zero is less than one million), technically you could be classified as a Level 2 merchant by your processor or acquiring bank.
For merchants that accept MasterCard, and that would be most merchants, things get further complicated regarding what you need to do for reporting. A few years ago, MasterCard tried to get Level 2 merchants to do a ROC for compliance instead of an SAQ. Thankfully after a lot of complaints, that requirement died a quick death. However, as of June 30, 2012, MasterCard is requiring their Level 2 merchants to:
- Use an internal person certified as an Internal Security Assessor (ISA) by the PCI SSC to create their Self Assessment Questionnaire (SAQ); or
- Use a Qualified Security Assessor (QSA) conduct the PCI Security Assessment Procedures (SAP) and file a ROC.
So those of you Level 2 merchants that were looking forward to only doing an SAQ, you might want to clear that with your processor first.
And remember, if you are classified as a Level 2 merchant by one card brand, you are that level for all other card brands. So, if you get caught in the JCB conundrum I described above, you will be a Level 2 merchant to MasterCard and you may have to do a ROC.
What Is A Level 3 Merchant Exactly?
At Level 3, things get a bit more complicated, mostly because at this point some of the card brands do not even have a Level 3 classification. However, as I stated with Level 2, if you have JCB cards being processed, you will end up as a Level 2 merchant regardless,
Where Level 3 really confuses people seems to be the fact that the criteria now focuses on one particular type of sales delivery method, e-commerce. If your organization meets any of the following criteria, you are a Level 3 merchant.
- 20,000 to one million Visa e-commerce transactions annually
- 20,000 combined MasterCard and Maestro e-commerce transactions annually but less than or equal to one million total combined MasterCard and Maestro e-commerce transactions annually
- 20,000 to one million Discover card-not-present only transactions annually
- Less than 50,000 American Express transactions
An additional trick with the Level 3 merchant classification is related to the e-commerce sales channel. According to Visa, MasterCard and Discover, if your organization has 20,000 to one million e-commerce transactions, you can also have less than one million transactions through other sales channels such as physical stores, mail orders and telephone orders and still be a Level 3 merchant even though your total number of transactions technically exceeds one million transactions and is less than two million in total.
As with Level 2, if you are a Level 3 merchant for one card brand, you are a Level 3 merchant for all card brands.
Level 4, I Can Do Nothing
Level 4 merchants process less than 20,000 Visa e-commerce transactions annually and/or process up to 1 million transactions annually. As with the other merchant levels, if you are classified as a Level 4 merchant, you are a level 4 merchant for all card brands.
As a Level 4 merchant, you are only recommended to attest to your organization’s PCI compliance. This means that filing an SAQ with your processor or acquiring bank is not required by the card brands. However, as I posted earlier, some processors are not only requiring that Level 4 merchants file an SAQ, they also require that a QSA sign off on your SAQ. If you are a Level 4 merchant in Canada, Visa Canada is also requiring that a Level 4 merchant’s SAQ is signed off by a QSA. (As of October 2010, a QSA does not need to sign off on a Level 4 merchant’s SAQ.)
Clear as mud, right? Well, there are some other issues that need to be considered before you can claim you are a particular merchant level.
Holding Companies And Legal Entities
What can bring the first twist into the merchant level setting process is how your organization is legally incorporated or structured. If your organization is a holding company with multiple legal entities underneath it, then your multiple legal entities will have their own individual merchant level and require an individual PCI compliance report filing. A good example of this is Yum! Brands and their A&W, Long John Silver’s, Pizza Hut, KFC and Taco Bell restaurants. The restaurants are separate legal entities and therefore have their own merchant level and their own PCI ROC.
Sometimes you can negotiate with your processor or acquiring bank to get your multiple legal entities treated as a single entity and do one compliance filing, but they are not obligated to go along with this request. The key is that you need to negotiate this change before you start your PCI compliance efforts, not after the fact.
Another fact that can complicate this holding company relationship is how the organization processes their transactions. In some organizations, the individual entities all process their transactions separately under their own merchant numbers and even possibly with their own processor(s) and/or acquiring bank(s). In other instances, the holding company aggregates transactions from all of the entities, but the transactions are still processed under individual merchant numbers and my be processed through different processors. And in a third variation, the holding company aggregates the transactions and processes everything under one merchant number. In the first two instances, typically each entity is going to be responsible for their individual PCI compliance and will report separately. In the last instance, the holding company is usually held responsible for each entity’s PCI compliance. However, any determination of what is correct is going to be up to the acquiring bank(s).
And one other thing that comes up regarding holding companies. There are organizations that attempt to use their legal incorporation as a way to manipulate the level setting process. They also have each legal entity process transactions through different processors so that their transactions volumes are not known between the processors. While in the past this was a good strategy to keep your organization creating SAQs, processors have gotten wise to this game and are talking to one another as well as documenting the processors used in the reports. So for those of you playing this game, it is only a matter of time before you will be found out and possibly have your merchant level changed.
Take a close look at your merchant agreement regarding PCI compliance. There should be a statement that says if you suffer a breach, your organization will automatically be classified as a Level 1 merchant for PCI compliance purposes, regardless of transaction volume. All of the card brands added this to their merchant agreements a number of years ago.
Unless you are already a level 1 merchant, just the thought of not being able to file a SAQ should put the fear of God in you. Conducting a full ROC, even for a small organization, will likely be extremely daunting and expensive. So there is added incentive for you level 2 through 4 merchants to make sure that they truly are PCI compliant.
So that is merchant levels. I hope this gives you the guidance you seek. It definitely should give you the background you need to discuss the topic intelligently with your processors and acquiring banks.
UPDATE: I ran into a person from Yum! Brands at the 2011 PCI Community Meeting and they informed me that they file one ROC for all of their restaurant brands, however, technically they could file separately for each, but they do not. I was only using them as an example and apologize for misrepresenting their filing status.