An MCC, or Merchant Category Code, is a four-digit number that is assigned by credit card companies to merchants when they first start accepting credit card payments. This code essentially classifies a business according to the type of goods or services it provides.
Originally established by the IRS to streamline 1099 reporting, MCCs now impact everything, from chargeback resolution to conversion rates, payment processing fees, and even whether or not card payments are accepted in certain regions.
If you’re just starting to accept credit card payments, recognizing the role that MCCs play in your business will help you better understand how they can affect your bottom line.
MCCs and tax reporting
Every business is required by the IRS to provide an end-year 1099 form detailing payments made for services, along with other miscellaneous income.
Before merchant category codes, the IRS had to sort through large volumes of data to determine reportable payments. Now, all a merchant needs to do is reference the contractor’s MCC to find out if a 1099 report is required for the payment. So, if you contract a repairer to fix your office computer, referencing their MCC in your 1099 form will make it easier for the IRS to process your tax returns.
Since merchant category codes place businesses to particular market segments, they come into play in many situations besides tax reports. Anyone, from acquirers, payment service providers and card networks to other businesses and even customers can look up your MCC if they want to know the nature of your operation.
For instance, major card schemes use MCCs to determine the interchange fees a business will pay to accept credit cards. These fees make up a significant percentage of a merchant’s overall payment processing fees.
If your MCC places your business in a known high-risk category, such as one which is marred by strict government regulations or high chargeback rates, a payment processor will likely charge you more interchange fees to pre-emptively mitigate the risk. On the other hand, low-risk businesses, along with establishments like non-profits and schools carry lower-than-average processing rates.
MCCs and Chargeback resolution
Merchant category codes heavily impact chargeback management. More often than not, a high-risk MCC will undermine how compelling your evidence will be when disputing a chargeback. Some of Visa’s chargeback reason codes carry adjustments based on specific MCCs.
Moreover, businesses with high-risk codes are subject to higher chargeback fees, which means that if yours is a high-risk business, you will probably need to establish a reserve account for any potential chargebacks.
Getting an MCC reclassified
Of course, assigning MCCs isn’t exactly an accurate process. It’s common to find businesses operating with codes that don’t precisely describe them.
Before reaching out to your bank for a review of your code, perform a Visa MCC lookup to confirm if there was a misclassification. You may also want to try understanding why you were allocated that code in the first place. That way, you can make a good case for having your MCC reviewed.