The Merchant Category Code Explained: What MCC Codes Really Mean for Your Business
Want your customers to pay using their credit cards? Any business applying for credit card acceptance is assigned a merchant category code, or MCC. But what is it, and how does it affect your merchant account?
MCCs are four-digit numbers given by credit card issuers, namely Visa, MasterCard, Discover, and American Express, so your business can be correctly defined and classified within the ocean of data they’re handling.
Merchant category codes denote the type of business or service a company offers.
Established by the Internal Revenue Services (IRS) in 2004, merchant category codes are designed to streamline the process of 1099 reporting for commercial cardholders, so that businesses are properly classified into specific market segments.
What are merchant category codes?
Before the creation of MCCs, the IRS found it difficult to know which transactions were tied to which product or service, and only relied on merchants to know the difference.
Today, it’s much easier for both the IRS and commercial cardholders to determine if a transaction needs to be reported or included in the tax form — they simply refer to the MCC of the business. MCCs are also used by acquirers, card networks, payment service providers, merchants, and consumers for a whole lot more:
- Tracking purchases for retrieval requests and disputes management
Merchant category codes play a crucial role when there are chargebacks and disputes. Your MCC can impact the kind of evidence you need to provide to disprove a reversal, and the impact varies per card network. In conclusion, the more you understand your MCC, the better.
- Identifying high-risk merchants and prohibited businesses
Before working with a merchant, acquirers use merchant category codes to assess the risks associated with certain industries, such as in the case of high-risk merchants. MCCs are also helpful in identifying companies that operate under prohibited business types. That said, merchants who belong in certain MCCs may be denied services by some payment service providers.
- Determining interchange fees
Fees vary across networks, and card networks use MCCs to determine how much a business needs to pay the credit card processor for each transaction.
- Charging convenience fees
The option to charge convenience fees and similar features are based on a merchant’s MCC.
- Accepting HSA and FSA cards
For merchants who cater to the healthcare industry, only those who have healthcare MCCs are allowed to accept Health Savings Account (HSA) and Flexible Spending Account (FSA) cards in the United States.
- Earning and redeeming credit card rewards
If you want to get the best out of your credit card rewards and points, you may want to pay closer attention to MCCs. Not only are points calculated using MCCs, they’re tied to the MCC of the establishment you’re buying from. For example, if your credit card offers rewards for grocery spending, and you want to know whether the items you bought from the convenience store attached to a gas station count as “groceries” or “fuel”, you will need to look into the establishment’s MCC.
- Preventing certain purchases
Sometimes, MCCs are used to restrict certain transactions. For example, if a company issues corporate cards and wishes to prohibit employees from spending their card on pricey items, the company can arrange with their credit card network to only cover expenses tied to specific MCCs.
How to Find a Business’ MCC
The IRS publishes a complete merchant category code list, but all card networks also have their own list. In effect, merchants may have a different MCC with MasterCard than with Visa.
- For Visa’s merchant category code listing, you can view the Visa Supplier Locator Tool and the Visa Merchant Category Code List.
- For MasterCard merchant category list, check out the Quick Reference Booklet - Merchant Edition.
- For American Express, the MCC is supplied on the credit card statement for each transaction.
How are Merchant Category Codes Assigned?
According to the Visa Product and Service Rules, among the list of responsibilities acquirers have with merchants is to assign the most accurate MCC that describes a merchant’s business, based on the merchant’s most predominant business activity.
If your business is in the process of applying for credit card acceptance, you need to carefully consider the types of goods or services you sell before setting up a merchant account. Deciding whether to include a particular product or not can result in an MCC you may not want, so any additions should be examined as well.
It’s also possible to be assigned two or more MCCs, particularly if:
- A merchant deploys an Automated Fuel Dispenser and sells goods or services other than fuel
- A merchant has separate lines of business in one merchant outlet location
- A merchant has separate merchant agreements for each line of business
- Several merchant outlets in the same premises display different merchant names
- A merchant outlet has a line of business categorized as high-risk /li>In the US, acquirers are required by Visa to register, assess, and monitor high-risk merchants. High-risk merchant Visa MCCs include, but are not limited to:
- 5912 - Drug Stores, Pharmacies
- 5122 - Drugs, Drug Proprietaries, Druggist Sundries
- 5993 - Cigar Stores and Stands (Card-Not-Present)
- 7995 - Betting, including Lottery Tickets, Casino Gaming Chips, Off-Track Betting, and Wagers at Race Tracks
It’s worth noting that the wrong MCC has detrimental effects on a corporate credit card holder’s charging privilege. In other words, businesses can lose money and customers. In this case, merchants are encouraged to change their MCC.
To get a new one, merchants need to contact the credit card company and explain the reasons the MCC doesn’t apply. An investigation will soon follow, and the card company may need more information about the MCC change request to warrant approval. If the MCC can’t be changed, a specialized merchant processor may be necessary.