Often, governments and banks require specific information about a merchant’s business. This business can be owned and managed by an individual or several people at the same time. So how do these types of institutions distinguish between the multitude of businesses out there?
They do this through something called a Merchant Category Code, or MCC for short. So, what is a merchant category code? And do these codes affect business operations? In this article we will break down what they are and how they work.
What are Merchant Category Codes, And Why Do They Matter?
What is a Merchant Category Code?
An MCC is a 4-digit number that lets credit card companies determine the kind of physical goods or services your business provides to consumers. ISO (International Organization for Standardization) has made these codes and sets them according to the business’s nature.
Moreover, the IRS mandated these codes in 2004 to ensure a smooth tax reporting flow. Even though ISO defines MCCs, it is the credit card companies that assign them to a business when a business starts accepting credit card payments from consumers.
A business with independent components may have several merchant category codes. For instance, a grocery store with a pharmacy as an example. This store will have two merchant category codes: one for pharmacy sales and the other for grocery sales.
This shows that MCCs generally correlate to the types of sales the business is making. Credit card companies require MCCs to check which industries use their cards the most to perform transactions. In contrast, banks utilize MCCs to define interchange fees, rate options, cashback rewards, etc.
In today’s business world, credit card companies decide the merchant category code that should be assigned to a business. Now that you know what a merchant category code is, you might be wondering, “how important are merchant category codes?” Let’s have a deeper look at it.
Do Merchant Category Codes Matter?
MCCs are crucial for consumers and businesses. These codes define the transaction fees and rates for a merchant’s business. Here’s how they affect a consumer and a business:
- Affect on Consumers
MCCs affect the credit card reward calculations of a consumer. Credit card companies have developed spending categories that provide consumers with a set number of additional rewards or cardholder perks.
These spending categories offer rewards on a monthly or quarterly basis. Here is a fun fact – the eligibility for these rewards isn’t based on goods or services purchased. Instead, it’s the MCC that decides if a consumer is eligible for rewards or not.
For example, if a consumer buys a hot dog from a local grocery store, it may be charged to the grocery store category instead of a restaurant category. Having information about MCC allows cardholders to increase their rewards.
Consumers can also use MCCs to determine charges and look further into their bank statements. For example, an MCC can assist a consumer in identifying a charge on their monthly bank statement that they were initially unaware of.
- Affect on Business Owners
Merchant category codes affect business owners and businesses through the interchange rates they offer. For instance, Mastercard utilizes merchant category codes to regulate the fees a merchant’s business pays when it uses credit cards.
You may not know this, but credit card companies determine the interchange rate depending on the “risk factor” of a business. A higher-risk business might be charged higher fees and rates than others.
If any part of the business falls under an MCC that the credit card company deems “high-risk,” it will allocate a high-risk code to the merchant’s business. High-risk MCC on a business can also cause some other disadvantages.
These include
- Excluding businesses from eCommerce fraud protections that other businesses have. For example, merchant category codes assigned to money orders and gambling don’t receive these protections on transactions if the card isn’t present.
- During chargebacks, the fees charged can be higher.
In some cases, credit card companies don’t accept high-risk businesses at all. In addition, there are certain circumstances where you must have the right MCC to accept a certain card type. For instance, your business must have the right merchant category code if you want your customers to be able to pay for your goods or services from their Health Savings Account.
Moreover, not every business can charge a convenience fee to their customers for credit card payments. It’s the merchant category codes that decide if your business is eligible for it or not. On the other hand, a few businesses may get a lower interchange rate because of their MCC.
For example, businesses in the education or healthcare industries or nonprofit companies. Lastly, a merchant category code can also impact your business’s tax reporting. For instance, a merchant category code can impact your business if it reports payments on 1099-MISC Forms.
Affect of Merchant Category Codes on Chargebacks
Chargebacks are unavoidable for all merchants. However, using your merchant category code, you can determine what kind of chargebacks you are facing, how they can impact your business, and how your merchant category code can help you fight against them.
For example, tollbooths have protection from “No Authorization” chargebacks due to the way these businesses operate and handle transactions. How MCCs and chargeback reason codes interact can significantly depend on the credit card network and region where your business is.
Merchants may also receive “Invalid Data” chargebacks if they send the incorrect MCC while performing a business transaction.
A Popular List of MCCs You Should Know About
| MCC (Merchant Category Code) | Description | Business Examples |
| 5942 | Bookstores | Barnes and Noble |
| 5814 | Fast Food Restaurants | Burger King |
| 5411 | Grocery Stores | Fairway Market |
| 5812 | Restaurants | TGI Friday’s |
| 5912 | Pharmacies | Walgreens |
Here is a list of high-risk merchant category codes:
| MCC (Merchant Category Code) | Description |
| 7995 | Wagering (casino gaming chips, lotto tickets, betting on race tracks) |
| 5996 | Direct marketing (Outbound Telemarketing Merchants) |
| 5993 | Cigar stores |
| 5967 | Direct marketing (Inbound Telemarketing Merchants) |
Depending on the type of business, its MCC can be unique. For instance, companies with a minimum of $10 million in revenue can apply for a unique MCC from the ISO.
Conclusion
After reading this article, you should have a good understanding of what a merchant category code is and how it affects your business. These 4-digit codes can impact your business in many ways. From how you fill out forms to pay taxes and determine the credit card processing options to the fees you will have to pay, it all depends on MCCs.
Since merchant category codes determine the types of credit card rewards your customers would be able receive, having the wrong MCC classification may result in a dwindling customer base if they are not able to reap the rewards they’d like. However, you can avoid these types of situations by talking with your credit card processor and explaining exactly how you operate and what you sell. This will ensure that you are properly labeled and put in the correct category in order to classify your business and ensure that your customers can earn rewards properly.
