Decoding the MCC: How Merchant Category Codes Determine Merchant Status & More
Credit card processing is not a simple topic by any stretch of the imagination.
There are lots of rules, counter rules, and codes to remember. Understanding how merchant category codes, or MCCs, apply to merchants and cardholders is important. It’s a fundamental step toward wiser business practices and spending.
In this article, we’ll explain what an MCC is, why it’s important, what the codes are, and where to find them. We’ll also discuss how they affect cardholders and merchants.
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What is a Merchant Category Code?
- Merchant Category Code
A Merchant Category Code, or MCC, is a four-digit identifier that describes the type of goods or services provided by a business. The International Organization for Standardization (ISO) sets the MCC meanings and classifications, and card processors are responsible for assigning an MCC to a merchant at the start of their relationship.
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In theory, a merchant category code identifies the specific category that best describes the business in question. The classifications can be somewhat misleading, though.
Assignments are based on what the merchant offers at the time of the request. Thus, a change in business direction could leave the merchant with an incorrect merchant category code.
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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, the business eventually morphs into a landscaping company?
The merchant's line of work would be completely different than when the business started. Still, the code would remain the same unless a request to change it is approved.
Of course, assigning MCCs isn’t an exact science. It’s not uncommon to find merchants operating with codes that don’t precisely describe their business. It can still cause problems in specific cases, however.
Only companies classified as healthcare-based organizations can accept health-savings cards, for instance. But what if the supermarket where you shop—despite having a convenient pharmacy—is categorized as a grocery store? Your card might not work there 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.
Merchant category codes remain relatively consistent across the board. However, the codes used by the IRS don’t always match those of the card networks, and card networks don’t always match each other. A merchant can have one code with Visa and a different code with Mastercard.
To add to the complexity and confusion, different locations of the same store could have different MCCs. You may even have multiple codes in larger businesses, such as a discount store that sells gasoline.
The Merchant Category Code listings for these code ranges are as follows:
Retail Outlet Services
Professional Services and Membership Organizations
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 Do Merchants 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 way 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.
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Why are MCCs Necessary?
The Internal Revenue Service initially introduced merchant category codes to simplify 1099 accounting. This involves reporting payments made to contractors and other miscellaneous income.
MCC codes have evolved in the years since implementation. They now encompass a variety of subcategories that profoundly affect the way merchants and cardholders interact with banks and processors.
Some providers may also offer specialized features to businesses with specific MCCs. Whether the business has the option to charge a convenience fee for credit card purchases, for instance, could depend on the MCC assigned to them. Merchant category codes also influence the following:
Only certain items need to be reported via a 1099 form in the US. For example, the IRS doesn’t tax the qualifying products a merchant purchases, only the services. In other words, if a business owner buys a new computer, it won’t need to be reported. But, if that same merchant contracts a maintenance specialist to fix the computer, it requires a 1099.
Rather than digging through a year’s worth of individual receipts to try and identify reportable information, the merchant can use the contractor's merchant category code. This lets them quickly and consistently figure out whether business costs are exempt.
Merchants pay interchange fees on a per-transaction basis to cover the cost of accepting credit cards. Those fees make up a large percentage of a merchant’s overall card processing costs.
Having the correct code can benefit the merchant here, as certain MCC codes may qualify a merchant for reduced fees. Non-profits, schools, and grocery stores, for example, may receive lower-than-average interchange rates.
Consumer Cash Back & Rewards
MCCs determine how credit card issuers allocate cashback rewards. Merchants or issuers may offer “rewards” cards, for instance, letting cardholders earn points for certain types of purchases, such as an extra 3% on groceries. Gas or travel reward cards are other common examples. These rewards are commonly managed based on the MCC of the place of purchase.
This could be a huge factor for the user since the points are awarded based on the location of purchase, not the purchase itself. Consider a big box store or wholesale club with more than one MCC code. A cartful of groceries may qualify if you take it through the main checkout. But check out through the store’s garden center—which could have a separate code—and it may not qualify.
High-Risk Merchant Categories
Another thing to note is the MCC’s influence on merchant status. Some processors will use merchant codes to identify ‘high-risk’ industries that they may prohibit from their services altogether.
Businesses with high-risk MCC codes must resort to working with high-risk payment processors, which almost always involves increased processing fees. These merchants may also be subject to monthly sales amount caps.
Merchants with specific merchant category codes are considered a liability because the products or services they offer are commonly associated with high chargeback rates. Thus, MCC codes can exacerbate an already complex situation for high-risk merchants, which we’ll discuss in more detail in the next section.
Merchant Category Codes & Chargebacks
Merchant category codes directly impact chargeback management.
As most merchants are aware, chargebacks take a lot of time and effort to manage. They also represent a substantial drain on the merchant’s finances. Therefore, it behooves merchants to appropriately prepare for—and respond to—chargebacks within set time limits. 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.
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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.
Can Merchant Category Codes Lead to Declines?
Yes. This can happen in some scenarios, however, it is pretty rare.
Usually, when this happens, it’s because 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.
Also, 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 readily recognize cards that may not be approved for transactions at their establishment. Cardholders should refer to their guidelines for qualifying merchants.
Need Help With Your MCC?
MCC codes are a critical component of every business when accepting credit cards. They are decided by credit card processors at the start of the application process and indicate what type of business you have and what products or services you provide.
Understanding how this code affects one's 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 specific 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 can be affected by chargebacks. Contact us today to see what we can do to ease the burden of chargebacks.