As a business owner, you often refer to yourself as, well, a business owner. But in the payments industry, we refer to business owners as “merchants”. Every merchant that we work with is in a specific business category. And each one is assigned a code that corresponds to that business type or category. But have you ever heard of a Merchant Category Code? Do you realize you have one and do you know what it is?
Most people know that there are many industries and many areas of business specialty. In fact, there are 69 industries and 158 sub industries within the 11 global business sectors. And there are hundreds of thousands of businesses within those industries and sub industries. But did you know that every business is assigned a code that corresponds to their business type? And did you know that code is used by various entities to decide how a particular business is dealt with?
These business codes are called Merchant Category Codes or MCCs for short. Business owners can be either positively or adversely affected by their code. While you don’t have a lot of control over your merchant category code, it’s important to understand what it is and how it’s used.
Today, we’re going to talk about MCCs, who uses them, and how their use can affect your business.
What is an MCC?
The Merchant Category Code is a four-digit number used to identify the business category of a merchant. Card brands such as Visa, payment processors, and even the IRS use MCCs to identify the type of business they’re working with.
As you can imagine, there are hundreds of different merchant category codes. There is a category code for almost every type of business out there. And many businesses fall under more than one category code. There are generic category codes and more specific subcategory codes. And there are specific criteria that must be met for each category code.
For example, 4722 is the MCC that designates travel agencies and tour operators, including businesses that book accommodations for travelers. However, Lodging (Hotels, Motels, and Resorts) has its own specific MCC of 7011.
Unless you're Hyatt, then you have your own personal MCC (3640), as do all the major hotel chains. And major airlines. And many other large companies.
So, you can see, the Merchant Category Code Index is vast, and maybe a bit convoluted.
Who created the merchant category codes?
The International Organization for Standardization (ISO) created the code set and their definitions. The ISO is a team of experts that set international standards for a variety of subjects. They create standards for food safety, IT security, and energy management, among others. All the things that help our world operate.
Credit card processors, however, are the ones responsible for assigning each of the codes to a business or merchant. The processor assigns the merchant category code to the business during the application process for a merchant account. Merchants do not get to choose their MCC, but they do have a hand in making sure it is the correct one. When you apply for a merchant account to accept credit cards, you are asked to describe your primary business type.
The processor assigns your MCC based on the information that you give on the application. They must determine which code most accurately describes the primary type of business. This tells the underwriters what type of business is applying for a merchant account. The bank will also consider the level of risk the business brings by the MCC that was assigned to the merchant. The level of risk they decide on will affect your merchant account rates.
MCCs are used for many reasons other than credit card processing.
The IRS uses MCCs to determine the difference between businesses that provide a service and ones that offer goods. They can compare a person’s transactions to the MCC of the business where the transaction occurred. By looking at the MCC, they can easily figure out the type of business you purchased from without having to look up the business. The IRS uses this information to determine which purchases are reportable to the IRS for tax purposes. Purchases for primarily services are reportable to the IRS. Purchases for goods are not.
Banks also use merchant category codes to determine business type. The codes help banks determine when to award cash back or points to consumers who shop at these establishments. Let’s say Visa gives its cardholders 5% cash back at restaurants. How do they know which of all the transactions were at a restaurant? The MCC tells them which charges on an account occurred at a restaurant. They then use this information to calculate the 5% cashback on the correct charges.
How do you find your Merchant Category Code?
Merchants rarely look up their own code. But they really should.
If you’re already processing payments, you’re not likely to find your MCC classification listed on your merchant statement. Instead, you will need to contact your processor to ask what category code they assigned to you. If you’re applying to open a new merchant account, ask the processor which code they will use when they submit your application.
But you can also look up the MCC list created by the International Organization for Standardization yourself. Knowing the MCC that you believe most fits your business helps ensure you are assigned the correct code.
To look up the merchant category codes, any major card brand’s website is a great place to start. All major card brands keep their own list of Merchant Category Codes to refer to. But they are largely the same from one card brand to another. You can access Visa’s list here. The IRS also keeps a list available to the public on their website, but you may find slight differences from the card brand’s lists.
Once you know your Merchant Category Code, you can compare it to the code your processor assigned you. If they don’t match, it could be due to mis-coding your merchant type. Or, it could be that your business doesn’t meet the criteria of the other MCC.
Merchants should know their MCC, and what it means for their credit card processing.
It’s especially important for high-risk merchants to know their MCC and why it was assigned. High-risk merchants already pay high credit card processing rates. It’s also hard for them to get a merchant account at times. Acquirers use MCCs to identify high-risk business models and prohibited business types.
Many payment processors won’t accept certain high-risk business categories. When this type of business applies for a merchant account, they turn them down as soon as they see the MCC. Again, the code makes it easier to identify business categories. Instead of looking through a list of business types the bank prohibits, they can simply look through the list of prohibited codes. Much quicker.
But this is exactly why it is good for business owners to know their MCC. This way you can be sure your application is being submitted with the most correct MCC that applies to your business type.
An incorrect Merchant Category Code can put you at risk.
Did you know that a sales agent can manipulate your MCC to help get you approved? It can be difficult to get a high-risk merchant approved for a merchant account. Especially if they don’t specialize in high risk and/or don't have the proper solutions. That means the sales agent won’t make any money. And he won’t meet any new-account quotas set by his processor.
One way around it is to assign a merchant category that closely aligns with the business type. One that has a better chance of being approved. Is it unscrupulous? Yes. But, unfortunately, this type of thing happens all the time. This is no good for the merchant. And it's no good for the industry either.
Once underwriting discovers the business’s true nature and that you’ve been processing under an incorrect MCC, they freeze the account. In some cases mis-coded MCCs could be construed as bank fraud. And you don't want the IRS to think you're lying about your Merchant Category, since the processor reports to the IRS.
But, in addition, this practice undermines merchant’s trust in credit card processors.
Certain MCCs can also mean special rules for a business.
There are also concessions made for certain businesses that don’t apply to other business types.
Acquiring banks use MCCs to identify businesses that are eligible for interchange rate discounts. They also use them to determine businesses they won’t extend certain services to. For example, some business types are not eligible for chargeback protections. Other times, certain payment types can only be used at specific merchants, or not used at specific merchants.
Because of this, it can be said that your MCC can affect your interchange rates and your ability to receive chargeback protections. Let’s dive deeper...
Your MCC affects your interchange rates.
There are certain privileges, if you will, that banks and card brands extend to some business types but not others. Likewise, there are also restrictions and limitations put on some business types.
For example, let’s consider very high-risk business types. Banks will set base interchange rates higher for high-risk businesses than for standard or low risk. In addition, card brands may not extend as much chargeback protection to these business types. Or they won’t allow the business to charge a convenience fee.
They use the MCC code to quickly identify these business types so they can assess the correct fees and/or restrictions on the merchant account. So, low risk, standard businesses are afforded better rates and more protection than other business types.
There are also benefits from the card brands and card issuing banks for certain business types. The payment card industry makes concessions for certain businesses by giving them access to discounted interchange rates. Non-profit organizations, grocery stores, and schools are just a few examples that are eligible for discounted rates.
In these cases, the correct MCC code will help banks identify you as an eligible business type. If you were given the incorrect code, you could pay more for your rates than you should.
The industry understands that eCommerce merchants have their (un) fair share of chargebacks. And because of that, banks use a different batch of chargeback protections for this set of MCCs than other high-risk businesses.
So, you can see there are times when making sure you have the correct MCC can benefit greatly.
Your MCC code can also affect the types of cards you can accept.
Sometimes, merchants are unable to accept certain card types. And other times, the card brand can choose to ban certain merchants from putting a charge onto their card. This is because there are certain types of payment cards that can only be used at specific merchants. For example, health care providers are able to accept HSA cards and Flexpay payments from patients. But those card types are not accepted at other merchant types.
To monitor this, only the correct healthcare MCC can process those types of cards. A patient can’t walk into a grocery store and try to pay with their HSA card. The transaction will be declined because that MCC code is not allowed to accept those card types.
Or, sometimes a card can ban specific merchant types.
When a corporation issues corporate cards to their employees, they are allowed to set certain businesses and business types as prohibited. The corporation is able to exclude certain business types where their employees are not allowed to use their corporate card.
For example, an employee can use their corporate card to pay for hotel stays during business travel. But the card can be set to prohibit high priced hotels. So if an employee tried to use their card at a St. Regis, for example, the transaction would decline when the MCC for that hotel showed up.
While you can’t set your MCC, it is important to understand your Merchant Category Code classification.
It is the card brands and the card issuing banks that decide which business types have lower rates, higher rates, or accept specific cards. The MCC helps them to easily identify these business types.
Having a certain MCC isn’t going to “cause” you higher credit card processing rates. It is your business type that is causing you to pay higher rates. But the MCC helps the card brands recognize you as a certain business type, in this case “high-risk”.
For this reason, it is very important you are given the most correct MCC. This actually could affect your level of risk, interchange rates, card acceptance, and chargeback protections.
As you’ve seen, there are several ways your MCC classification can affect your business.
Sometimes, it is just that your business is a high-risk industry type. There’s nothing you can do about it. Other times, you could be paying more because a more specific category code was missed. Which is what would happen if a non-profit business was coded as a regular business. It can be quite detrimental if a business does not have the most correct category code for their business.
Let’s consider the recent experience of one of our merchant clients. Their story is a prime example of the consequences of an incorrect merchant category code classification:
When the merchant filled out their application, they described their store as a convenience store. Convenience stores and grocery stores have separate MCCs. The sales agent assigned the merchant category code that matches that type of store, not a grocery store. But a lot of their customers were WIC cardholders who purchased groceries from them. Only WIC approved merchants are allowed to accept WIC cards for payment. Grocery stores are WIC approved, convenience stores are not.
They were categorized as a convenience store. So when the customer tried to purchase groceries, their cards were declined. This put both the merchant and their customers between a rock and a hard spot.
Because of their description, they didn’t have the right MCC for their business. Fortunately, once a better description of the business and its primary purpose was given, they could be assigned the correct MCC. This allowed them to accept the WIC cards and serve their customers.
An experienced high-risk MSP understands how to maximize interchange, legitimately.
High-risk businesses already pay a price for merchant services. Why chance getting assigned a MCC that does not maximize your business type? An experienced merchant service provider (MSP) will take the time to learn about your business model. They will not be lazy and assign the first Merchant Category Code that they find to you. They won’t mis-code your business either.
At Bankcard International Group, we are experienced Merchant Service Providers. And we know how to maximize your interchange rates the right way.
Our payment advisors are all ETA- Certified Payments Professionals. They have each demonstrated a high level of knowledge in the intricacies of the payments industry to obtain this voluntary certification.
We take the time to learn about your business and your needs. We ask questions about your primary functions, your chargebacks and your customers. This helps us determine the best and most correct MCC for your business. Because of this, we are fully prepared to advise you on the best fitting solution for your business.
If you’re not sure of your Merchant Category Code, check in with us. We will be happy to look that up for you anytime and review whether it is still the most appropriate classification for your current needs.
If you’re looking for a merchant account and want an experienced processor that is focused on your business, call us.