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.
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.