At emerchantpay, we like to demystify the terminology and processes that make up the payments industry. This week we tackle merchant category codes (MCC’s), exploring what they are, their history and why they are important.
What is an MCC
An MCC is a four-digit number which indicates the market a business belongs to. MCC’s are useful for determining which goods and services are tied to specific transactions. As of 2004, they were made a requirement by the Internal Revenue Service (IRS) and card schemes, such as Visa, Mastercard and American Express, became responsible for creating a comprehensive list of relevant codes. Once a business starts accepting card payments, an MCC will be assigned to them by the acquirer with which they have opened their merchant account. The code will be assigned based on the goods and services that the merchant sells.
The importance of merchant category codes
Merchant category codes hold vital information necessary to the financial players in a transaction flow. Below, we detail how each party uses them.
MCC’s are used by the card networks to ascertain which industry a merchant belongs to and, therefore, what interchange fees they should be paying. Certain codes trigger lower fees, for instance, charities and businesses with lower chargeback rates could be charged less than other industries.
Issuers use MCC’s to determine the transaction type. This information is used to help calculate the risk score of each transaction and can affect whether it is approved or declined. If for example, a transaction has a merchant category code related to gambling but is initiated from a country where gambling is illegal, the transaction would be declined.
Consumers can accumulate rewards or points on select credit cards when paying for certain goods or services. MCC’s identify whether points should be provided for each transaction.
Acquirers assign merchants with an appropriate MCC that is aligned with their product portfolio. Occasionally, one merchant will be classified under multiple different MCC’s as acquirers can have different processes for categorisation. However, misclassification could result in fines from the card schemes.
Merchants should make sure they are correctly classified and are being charged with accurate interchange rates. Misleading or incorrect classification could result in your business paying higher fees, so it is always worth double-checking. Furthermore, depending on your MCC, there could be restrictions in place that you’ll need to be careful to adhere to.
MCC’s can help limit chargebacks and impact dispute management as they act as a second point of recognition for the consumer and may prevent them from reporting a previously unidentifiable transaction as fraudulent.
Additionally, MCC’s are important in countries like the United States, for determining whether payments need to be reported to the IRS, or the equivalent tax body.
History of merchant category codes
Prior to 2004, Standard Industrial Classification Codes (SIC’s) were the primary indicator for types of business but were not specifically designed to differentiate verticals during credit card processing. So, this is were MCC’s came in and have been growing in number since their inception. There are a few factors which can help explain the increase in MCC’s, however, it was largely due to new industries springing up.
Another reason for the increase in MCC’s is that individual companies have grown large enough to warrant their own. Airlines used to fall under one collective code, but some bigger companies like British Airways have since gained their own unique MCC to better manage their payments. Since then, other travel companies have followed suit.
Furthermore, the legalisation of online gambling in some American states has led to the creation of new MCC’s. These new codes are designed to differentiate between licensed and unlicensed gambling institutions.
Conclusion
In the future, further diversification of MCC’s is likely, with the potential for emerging sectors, like cryptocurrency exchange, to be given their own code. As the regulation of certain industries increases, and in turn, fuels a larger volume of card payments, the card schemes may see the need to create new ones. Merchants should be attentive to the changing landscape of MCC’s and ensure that they are properly categorised.
At emerchantpay, we offer flexible payment solutions across a range of verticals. If you’re interested in learning how we can help drive efficiencies in your business, get in touch