MCC Codes (Merchant Category Codes)Why Merchants & Cardholders Alike Can Benefit From Understanding Merchant Category Codes

Decoding Your MCC Code: How Merchant Category Codes Determine Merchant Status & More

You can think of a merchant category code — commonly known as an MCC or MCC code — as a four-digit identifier that neatly classifies the type of goods or services a business provides.

MCC codes were originally developed for tax reporting purposes. However, these codes have taken on a much broader role in the payments space. They offer valuable insights into cardholders' spending habits, and allow for special promotions based on a merchant’s product vertical. For example, think about when card issuers offer bonus cashback or other rewards for buying certain products. They can even help merchants segment different facets of their business and insulate them against losses.

Now, let's dive into MCC codes, explore their role in transactions, and see how merchants and cardholders alike can leverage them to gain greater insight into the payment space.

What is a Merchant Category Code?

Merchant Category Code

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A merchant category code, or MCC code, is a four-digit identifier that describes the type of goods or services provided by a business. The International Organization for Standardization (ISO) sets MCC meanings and classifications, and card processors are responsible for assigning an MCC to a merchant at the start of their relationship.

Every time you use your credit card, the transaction is labeled with a merchant category code that mirrors the type of business you're dealing with.

MCCs guide card issuers in deciding the rewards that cardholders accumulate for purchases. Additionally, they aid in tax reporting; certain product categories might be subject to specific tax rules or deduction applicabilities, as determined by the MCC. A merchant’s MCC can also influence the fees they pay for card transactions.

It's worth noting that, while many MCCs are standardized across card issuers and networks, some variations might crop up. Businesses that sell a broad spectrum of goods might have multiple MCCs. And remember, as with many standards, these codes can adapt and shift over the years.

How Are Merchant Category Codes Used?

MCC codes have roots in the International Organization for Standardization (ISO) codes and the Standard Industrial Classification (SIC) system. However, card networks sometimes tailor these codes to better fit their specific needs.

Here are a few examples of the ways in which MCC codes can come into play:

• You possess a credit card that offers 2% cash back on dining. Therefore, any transaction with a merchant designated with MCC code 5812, representing restaurants, should earn you that reward.
• The interchange fee that a business pays can be influenced by its MCC. For instance, a business flagged under the gas station MCC, but also involved in car rentals, might pay different fee structures compared to a pure-play car rental company.
• Companies often contract services from freelancers or external entities. It's the company's duty to notify the IRS and provide a 1099 form to the service provider. During credit card dealings, the MCC becomes a handy tool to discern if the transaction merits reporting.

While MCCs aim to categorize businesses accurately, it's not always a perfect match. Some merchants might find their MCC doesn't precisely reflect their primary operations. This can occasionally lead to complications, as we’ll see below.

Common MCC Code Mixups

In theory, a merchant category code identifies the specific category that best describes the business in question. Classifications can be somewhat misleading, though. MCCs are assigned based on merchant products at the time of the request. A change in business direction could leave the merchant with an ill-suited merchant category code.

An example might be a plumber who opens their own shop. The plumber would most likely be assigned MCC code 1711: Heating, Plumbing, A/C. But what happens if, over time, their work evolves to specializing in lawn sprinkling systems? And, when that leads to other lawn care services, and the business eventually morphs into a landscaping company — then what happens? The merchant's line of work would be completely different, but the code would remain the same unless a request to change it is approved.

For another example, companies classified as healthcare-based organizations can accept health-savings cards. But, what if the supermarket where one shops is categorized as a grocery store only, despite having a pharmacy component? The card might not work if they don’t have a distinct MCC for the pharmacy side of the business.

List of MCC Code Ranges

There are hundreds of MCCs published by the ISO. They are not allocated at random, though. Instead, they fall into broad, general ranges based on the first digit of the MCC.

The Merchant Category Code listings for these code ranges are as follows:

Merchant category codes remain relatively consistent across the board. That said, the codes used by the IRS don’t always match those of the card networks. Those codes used by the card networks don’t always match each other, either. A merchant can have one code with Visa and a different code with Mastercard.

Different locations of the same store could have different MCCs. Or, the store may have multiple MCCs for different products.

A merchant MCC can be changed, but such changes are improbable and infrequent. Merchants are usually stuck with whatever code they’re initially assigned. Since MCC codes serve more than one function, particularly in eCommerce, it’s still important to look at and understand the effects specific codes can have on a business.

How To Lookup a Merchant Category Code

This is trickier than it seems, as this code may not be visible on the merchant’s statement.

The easiest way to find one’s MCC code is to examine the billing descriptor that appears on a customer's statement after completing a transaction. It might show the four-digit code, or it might simply list the category's name. You can then cross-reference the category name with the numeric MCC.

Another option is to search for the merchant category based on the merchant. This tool allows you to search for merchants individually and look up their associated MCC. You can focus your search according to location or a specific company name.

To search, you often only need to enter the company’s zip code. You must make sure that the company name is entered correctly, though. Variances like similar names or franchise businesses can provide erroneous results.

Why are MCCs Necessary?

TAs mentioned above, the Internal Revenue Service initially introduced merchant category codes to simplify 1099 accounting. This involves reporting payments made to contractors and other miscellaneous income.

In the years since implementation, MCC codes have taken on additional functions that affect the way merchants and cardholders interact with banks and processors. Some providers may offer specialized features to businesses with specific MCCs, for instance. As another example, deciding whether the business has the option to charge a convenience fee for credit card purchases could depend on the MCC assigned to them.

Merchant category codes influence:

MCC Codes, Declines, & Chargebacks

Two of the primary ways in which a merchant’s MCC code may negatively impact their business are related to transaction declines and chargebacks.

Transaction declines may happen if a cardholder tried to use a card restricted to only specific merchant category codes. EBT cards, reward cards, or health care savings cards fall under this mantle. So, if a cardholder attempts to use these cards for purchases that are not authorized for that card type, the decline may show up as an MCC code error.

If the merchant in question has any restrictions placed on them due to their MCC code, or if they have recently changed merchant status, these situations can be read as MCC code errors. Ideally, the merchant and their staff should recognize cards that may not be approved for transactions at their establishment.

Merchant category codes directly impact chargeback management, too. As many merchants are already aware, chargebacks take a lot of time and effort to manage. They also represent a substantial drain on the merchant’s finances.

Effective chargeback management can help alleviate many chargebacks that push merchants over the high-risk threshold. If a merchant is locked into a high-risk MCC, though, there may not be much they can do to convince the bank that they don’t represent an elevated risk.

Businesses assigned high-risk MCC codes are subject to higher fees for individual chargebacks. They may become fee-eligible more quickly than other merchants. And, regardless of the merchant’s actual track record with chargebacks, they may be required to set aside funds into a designated reserve account to cover potential future chargebacks.

Have Additional Questions?

Understanding how merchant MCC codes affect operations can help decide whether or not to register as a nonprofit, for instance. It also helps determine whether to request additional MCC codes that apply to an expanding part of the business.

Beyond reaching out to a credit card processor, however, there isn’t much a merchant can do to make the final decision about their MCC code. The decision is based on criteria identified by the credit card processor at the time of application.

At Chargebacks911®, it’s our business to understand the dynamics of the eCommerce business, including how MCCs relate to chargeback issuances. Contact us today to see what we can do to ease the burden of chargebacks.