Why Do Merchants Need to Know Their Merchant Category Codes?
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Merchants come in all shapes and sizes, from the single-person operation that sells handcrafted items out of a garage to the massive eCommerce corporations that sell everything from paper towels to diamond watches. Though they all share some things in common—like dealing with the headache of chargebacks—card net works, banks, and governments often need specific information about what kind of business a merchant is engaged in.
Fortunately, there’s a system for that: Merchant Category Codes. These codes specify the nature of the business a merchant is involved in. What do merchants need to know about their Merchant Category Code and what implications does it carry for their operations?
For many merchants, their Merchant Category Code, or MCC, isn’t something they need to think about very often. It's something that was assigned to them when they opened their business, and may seem like a detail that’s only of interest to tax preparers and payment processors. Some MCCs, however, may place limitations, requirements, or even incidental benefits upon the merchants that bear them.
If you know that your MCC is influencing your sales, costs, or other aspects of your business in some way, you can take steps to mitigate that fact—or use it to your advantage.
What are Merchant Category Codes?
A Merchant Category Code is a four-digit number that identifies the type of products or services the merchant provides. They were mandated by the Internal Revenue Service in 2004 to facilitate tax reporting. Currently, the MCC guidelines are maintained by the International Organization for Standardization.
MCCs make it easier to determine whether a transaction needs to be reported, reimbursed, or otherwise subjected to special handling.
For example, the MCC can draw an immediate and clear distinction between taxable purchases of physical goods and non-taxable purchases of services.
They can also be used to control corporate credit cards—the cardholder may be allowed to use the card for travel and dining MCCs, but not for entertainment, clothing, and so on.
How are Merchant Category Codes assigned?
While the ISO may be in charge of defining the MCCs, it’s the credit card networks who dictate which code will be assigned to a merchant. This is not always as straightforward a process as it might seem. Different networks may have different takes on what a merchant’s “primary” service or product line is, which means that a merchant can have more than one MCC—an eclectic little store might be MCC 5945 (Hobby, Toy, and Game Shops) to Visa and MCC 5970 (Artist Supply Stores, Craft Shops) to Mastercard.
Card networks also have different standard for when a merchant must be assigned more than one MCC to categorize different parts of their business. For example, a business that is assigned two MCCs by Visa might be assigned only one by Mastercard, or vice versa.
Once a merchant is assigned an MCC, it tends to stick, even if the nature of the merchant’s business evolves and becomes something else entirely. It is possible to try to get your MCC changed, but the process isn’t very user-friendly and card networks may take a long time to investigate and decide whether they’re willing to re-categorize you. For this reason, most merchants don’t bother updating their MCC unless it is impacting their bottom line in some way.
A number of airlines, hotels, and other travel and hospitality-related businesses have unique, individual MCCs. Large retailers with multiple divisions may have several MCCs assigned to different locations within the same store. A big box store, for example, could check you out as MCC 5193 (Florists Supplies, Nursery Stock and Flowers) in the garden center and MCC 5013 (Motor Vehicle Supplies and New Parts) at the attached auto body shop.
In most cases, having multiple MCCs for different parts of a business is not required, and the card network will simply assign the code they think best represents the business's primary category. However, if even a minor part of a merchant's business would fall under a code that the card network considers high risk, it will assign the high risk code in addition to the primary one.
Additionally, each card network has specific circumstances in which they require multiple MCCs. The most common one pertains to gas station with convenience stores, where the automated fuel dispensers must use a separate MCC. Other examples include hotels containing restaurants, casinos that offer food and drinks, and any store that offers lottery tickets in addition to their primary business.
Why do Merchant Category Codes matter?
There are a number of cases where a merchant’s MCC will directly impact their business. Some MCCs are classified as “high risk,” and merchants with these codes are usually required to pay higher interchange fees to their payment processors due to the higher rates of fraud and disputes that these merchants generally experience.
While the list of MCCs is consistent across card networks, each card network has its own list of MCCs that it considers to be high risk. There's a great deal of overlap, of course, but there are some areas around the edges that card networks may treat differently.
This is Visa’s list of high risk MCCs:
- 5962 - Direct Marketing—Travel-Related Arrangement Services
- 5966 - Direct Marketing—Outbound Telemarketing Merchants
- 5967 - Direct Marketing—Inbound Teleservices Merchants (This can include digital content and adult content)
- 7995 - Betting, including Lottery Tickets, Casino Gaming Chips, Off-Track Betting, and Wagers at Race Tracks
- 5912 - Drug Stores, Pharmacies
- 5122 - Drugs, Drug Proprietaries, Druggist Sundries
- 5993 - Cigar Stores and Stands (Only merchants conducting card-not-present cigarette sales are considered high risk)
In addition, some banks and payment processors will refuse to do business with merchants who have certain MCCs. This may be because they don't want to deal with merchants in certain high risk categories, or because they don't want their brand associated with certain types of businesses, however tangentially.
On the other hand, some MCCs can have a positive effect for merchants. Many credit card issuers have reward programs that give their customers points or cash back for purchases at certain merchants, such as travel or groceries. These programs refer to the MCC to determine whether a purchase is eligible for rewards or not. Merchants with these MCCs may benefit from increased sales motivated by these reward programs. The MCC can also determine whether the merchant can accept Health Savings Account or Flexible Spending Account cards.
Do Merchant Category Codes affect chargebacks?
Every merchant is subject to chargebacks, but your MCC can be a significant factor in what chargeback reason codes can be used against you and what compelling evidence can be used to fight them. Tollbooths and hotels, to use one example, have some protections from “No Authorization” chargebacks because of the way those merchants are required to handle their transactions.
The interactions between MCCs and chargeback reason codes can vary considerably depending on the region and card network.
To put together an effective chargeback defense strategy, it’s essential that you know your MCC and research the dispute scenarios in which it will come into play.
Merchants may also find themselves liable to “Invalid Data” chargebacks if they submit an incorrect MCC with their transactions.
Know your MCC
Plenty of merchants have innocuous and accurate MCCs, and can rest easy knowing that it’s one thing they don’t have to worry about. Of course, the only way to be sure that you’re in that group is to know your MCC and find out whether or not there are any special rules or conditions attached to it.
If you’ve been assigned to an MCC that isn’t accurate—or no longer is—changing it may or may not be a matter of urgency. If, however, you’re being charged higher interchange fees, or you’re receiving chargebacks based on your MCC, it’s worth taking the time to make an appeal to try and get it changed. If you’re not sure where to start, your anti-fraud and chargeback partners can help you.
Who assigns merchant codes?