Mysteries Of Merchant Category Codes Revealed

May 12, 2020

Your MCC code has vast implications on your high risk credit card processing .

In your business, you may have come across a term called the merchant category code or (MCC).  What exactly is a merchant category code and how does it affect your business? We are going to tackle and demystify the term and how it directly affects your business below. 

Merchant Category Codes (MCC) Defined

A merchant category code is a four-digit number given to a business by an acquiring bank when this business opens up a merchant account in order to begin accepting Visa or MasterCard payments. MCC codes are used to categorize businesses according to certain market segments ever since the Internal Revenue Service issued the IRS Revenue Procedure 2004-43 within the Internal Revenue Bulletin 2004-31. 

For example, if you are an Agricultural Cooperative, according to the merchant category list, your MCC code would be 0763 for  “Agricultural Cooperative”.

How Are MCCs Used…Then and Now.

MCC codes were originally created by the IRS in 2004 to simplify reporting on the 1099 for business card holders. The IRS requests that businesses “report payments made for services on a year-end 1099 form”. However, the purchase of goods does not need to be reported. 

Before the MCC categorization was created, cardholders had to “sort through transaction-level detail” in order to determine if a card payment purchase had to be reported. 

Since the MCC has been established, cardholders can now identify the MCC of the business where the transaction was made to decide if the purchase needs to be reported to the IRS. 

Today, the MCC code has taken on a new role in the payment space. The International Organization for Standardization (ISO) is the one that establishes the MCC codes and its meanings. Credit card processors now assign these codes to merchants. 

Acquiring banks and payment service providers use these codes to determine fees, assess risk, and so much more. Each card network, be it Visa, Discover, MasterCard, and American Express has its own catalogue of MCCs. They do have similarities yet within certain businesses there are particular differences. 

Do MCC Codes Affect How Payments Are Processed?

Your MCC code portrays the “predominant business activity of the merchant,” and it  affects payment processing in the following ways:

  • MCC Codes Determine Interchange Rates: MasterCard and Visa use MCCs to establish interchange rates. This is considered the “wholesale price” that you will pay to process credit card payments. For certain payment processors, this could mean a lower interchange rate. However, for high-risk industries, the MCC code could mean higher interchange fees for each transaction.
  • Detect High Risk Industries: An acquirer utilizes MCC codes to detect “prohibited business types” and to determine risk before granting businesses a merchant account. 
  • Establish Chargeback Protections: There are certain MCC codes such as Direct Marketing, that don’t have fraud protection for eCommerce. Also, with high risk codes, you will experience higher fees for every chargeback issued.
  • Affects Which Payment Service Provider You Work With: The reality is that certain payment service providers will not work with a particular category of merchants. But not all is lost, there are plenty of companies out there whose specialization is in working with higher-risk merchants.

Key Takeaways 

We have seen that MCC codes are an essential part of your business when you accept credit cards as payment. They are determined by the credit card processors from the moment you fill out your merchant account application. This will identify what type of business you are and the products and services you offer. 

Getting familiarized as to how this code can impact your business will help you make more strategic decisions. If you are a high-risk merchant, it is not a death sentence to your business. There are plenty of high-risk payment processing specialists that will be more than happy to take you on.

Let us help you get a high risk merchant account today!

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Having a merchant account allows an account holder to take advantage of merchant cash advances. When a merchant is approved for an advance, the business agrees to receive a lump sum of cash in exchange for an agreed-upon percentage of future credit card sales.

Pricing varies depending on the merchant’s industry, past credit card processing history, the type of business seeking the account, average ticket sales, and average transaction volumes.

Yes, EMB works with merchants who are building their credit, as well as those who have poor credit. EMB also approves merchants that have no credit card processing history and businesses that have lost their merchant accounts due to high chargebacks.

Several factors influence a merchant’s risk level. Though only one factor likely will not get a merchant classified as high risk, a combination of these may: business size, location, and industry, credit score, credit card processing history, a industry’s reputation for excessive chargebacks, a prior history of high chargeback ratios, and whether a merchant exclusively sells online.

Virtual terminals are stationed on a merchant’s website, making it easy for customers to make a payment or purchase online. Merchants or a payment processor can easily set up virtual terminals, so online businesses can accept credit and debit card and e-check transactions.

A merchant account is a business account with an acquiring bank. Without this business account, which actually works more like a line of credit, a merchant cannot accept and process credit and debit card transactions. Businesses need a merchant account to accept major credit cards via a static point-of-sale terminal, mobile card reader, or through a virtual payment gateway.

After filling out EMB’s simple online application and submitting any necessary, requested documents, many merchants get approved within 24 and 48 hours.

EMB specializes in working with high-risk merchants. EMB works with many merchants, including but not limited to businesses in these industries: gambling and gaming, adult entertainment, nutraceuticals, vaping and e-cigarettes, electronics, tech support, travel, high-end furniture, weight loss programs, calling cards, e-books and software, and telecommunications.

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