All About Merchant Category Code (MCC)
Merchant Category Codes (MCC) refers to a four-digit number assigned by credit card companies to businesses for categorizing the type of products or services they offer. They also help businesses, credit card merchant account providers, and financial institutions assess risks, understand consumer spending patterns, and customize financial services accordingly. Additionally, MCCs help gauge the efficiency of payment processing systems by improving the accuracy of data analysis and streamlining transaction information in the financial sector.
Let us gain more insights into MCCs and how they are being used by businesses, credit card merchant account providers, and financial institutions to deliver superior, frictionless, and customer-centric solutions.
What are Merchant Category Codes?
Merchant Category Codes (MCC), also known as merchant classification codes, can be described as standardized identifiers within the payment processing sector to describe the products and services of a business. There are hundreds of merchant category codes out there, and the primary card networks (American Express, Discover, Visa, and MasterCard) share most of them.
Merchant Category Codes are based on the Standard Industrial Classification (SIC) codes and the International Organization for Standardization (ISO) codes for different types of businesses. Notably, a significant majority of MCCs are recognized by all card issuers and Credit Card Merchant Account processing networks but classifications and acceptance of some MCCs may differ from one to another.
Let us have a close look at some Citibank MCCs for the transportation industry:
4111 - Sub-urban & local commuter passenger transportation, including ferries
4112 - Railways
4131 - Bus Lines
4411 - Cruise Lines
4457 - Boat leases and rentals
4582 - Airports and Airport Terminals
4782 - Travel agencies & tour operators
You can find links to MCCs for some popular card networks here:
MCCs are of 4 digits and are usually used to help credit card companies, Credit Card Merchant Account providers, and banks identify if a purchase is eligible for cashback or rewards based on the business MCC. They are also used to understand charges on a bank or card statement and thus help in preventing chargebacks. For instance, if a customer forgets your business's name when they look at their statement, but the Merchant Category Code explains it was a "restaurant", they are more likely to remember the charge.
If a business deals in both products and services, the MCC of that business would generally reflect the business type that makes up a significant proportion of its sales. The business can apply for an additional MCC for a different set of products and services under its brand. For instance, a superstore that has both a pharmacy and a grocery store in a single location may have different MCCs (one for the grocery store and another one for the pharmacy) within the same building.
It is important to note that MCCs are assigned by the acquiring bank when a merchant account gets created and they are managed by card brands. Originally developed for tax reporting purposes, MCCs today help determine interchange fees, collect cardholder data, and improve the level of fraud protection. They play a crucial role when it comes to classifying different transaction types, products, and services offered by businesses on a routine basis. MCCs are also helpful to payment processors to identify the type of business products and services to find out whether a business is a low-risk or high-risk business.
MCCs also influence cardholder fees, such as foreign transaction fees or annual fees. For instance, a cardholder who frequently purchases in a category linked to higher processing risks or costs may have to deal with a higher fee structure. The list of advantages associated with MCCs doesn't end here. They play a big role in Internal Security Reviews (ISRs) and other measures to prevent fraud. These codes ensure that payments undergo stringent checks before final processing is performed. This helps in identifying suspicious transactions or activities.
What is a 1099 Tax Form?
A 1099 form can be classified as a federal tax form that is generally used to report different types of income other than wages from a job (that are reported in W-2 forms). Payers, such as businesses, supply this information to both the income recipient and the IRS. There are many types of 1099 forms such as form 1099-INT to report interest income, 1099-NEC to report payments made to non-employees for services, and 1099-DIV for dividend income.
Why MCCs are important for business owners?
MCCs help business owners identify whether or not they can report specific payments on the Form 1099-MISC. These codes also impact how and when a convenience fee can be charged on credit card payments. Some card companies use the MCC classifications to increase rates and transaction fees for "high-risk" businesses such as online casinos, adult entertainment, and pawn shops. Other codes, like those for nonprofit organizations and elementary schools, qualify for low interchange fees as a charity or public service.
Also, payment processors and merchant acquirers generally assess the relative risk associated with a business on the type of offered products and services to determine fees. For instance, WebPays offers Credit Card Merchant Account solutions to high-risk businesses such as those dealing in ammunition, pharmaceuticals, adult entertainment, online gambling, casinos, and debt consolidation. The methodology for Mastercard’s Decision Intelligence Score (MDIS) and Visa’s Advanced Authorization (VAA) also depends to a considerable extent on MCC classifications.
Why MCCs are important for cardholders?
Businesses are required by the IRS to report payments made for services, but not for the purchase of goods. The MCC classifications help cardholders understand which payments can be reported on the Form 1099-MISC.
If you own a personal rewards or business credit card that earns rewards for specific retail categories such as grocery stores or restaurants, you can leverage merchant category codes to find out which retailers can help you earn the most cashback.
Can MCC Classifications lead to declined transactions?
The answer is a yes if the credit card has an MCC restriction. For instance, you can use a health savings account card only for a merchant with a healthcare MCC designation, and not everywhere. If you try using this card at, say a restaurant or a bar, it will lead to declined transactions.
Why doesn't the MCC match up with the store services?
Let's say, you swipe your credit card at a convenience store that also has a gas pump outside. You may assume that you will earn the same miles or points as you would do at any other gas station in the country, but that might not just be the case if the Merchant Category Code doesn't classify the business as a gas station instead of a convenience store. In short, whatever service makes up the majority of the business influences the classification of the Merchant Category Code.
We hope that this information on MCCs and how they are being used by businesses, credit card merchant accountproviders, and financial institutions helped you gain a clear and complete understanding of merchant category codes.