Merchant category code (MCC): What it is and why it matters

Content Type: Article

Everything you need to know about the merchant codes that determine processing fees, prohibited transaction types and more.

As a business owner, chances are you’re familiar with North American Industry Classification System (NAICS) and Standard Industrial Classification (SIC) codes. These two systems are used by the U.S. Census Bureau and the Securities and Exchange Commission, respectively, to classify the type of business you run. No two businesses are exactly alike, though, and categorizing your business by NAICS and SIC might not fully capture the nature of the goods and services you provide your customers.

This is where merchant category codes, or MCCs, come in. Created by the IRS in 2004 to facilitate tax reporting, these four-digit codes are issued by payment processors to provide a granular view of the nature of your business. MCCs affect your business in important ways.

Capturing the specifics of your business

How your merchant processing account is set up is key. Correctly capturing your business’s details—including goods and services offered, expected or average ticket amounts and overall card processed volume—will ensure your payments process efficiently and effectively.

MCCs seek to capture with precision what businesses offer. Codes run the gamut from “Dry Cleaners” and “Tax Preparation Services” to “Wig and Toupee Stores” and everything in between.

According to Shea Thames, merchant services product manager at Regions Bank, most businesses provide one specific product or service that falls under one MCC. However, there can be instances when a singular business provides separate and distinct products and/or services.

For example, Thames says, “A car dealership might have one MCC for the car purchasing area and another for the service area. A convenience store may have one MCC associated with the food and other items sold inside the store, while another one may be attached to the gas pumps outside. Typically, a business owner would also choose to separate these not only by MCC, but also into separate payments processing accounts, which is also usually helpful for recordkeeping and other purposes.”

Beyond classification, MCCs are significant as you consider your customer, their needs and the payment types used in your establishment. MCCs can affect your customers’ ability to receive cash-back or reward points for certain types of transactions. In some cases, they can be used to ensure that prohibited transaction types do not take place.

Consider a customer base who regularly uses corporate cards. Corporate cards offer a good example, as they may have certain expense types that are—and are not—allowed by the policies of the specific business that provides them to employees. “Employees may use it for travel and dining, but not some expenses marked as entertainment or clothing,” says Thames.

Consumers today are savvy, and information is easily available about their card details and benefits, so as a business owner, ensure your business is one where they can use their card. And that benefits and rewards are not hindered based on MCCs.

Determining credit risk

Perhaps the most important aspect of MCCs from a business owner’s perspective is the fact that they are used to determine a business’s risk level—and, as a result, the amount they’re charged for each payment transaction. “An MCC corresponds to the payment processor’s perception of the chargeback risk your business poses,” says Thames.

There are multiple factors that determine risk level, such as average ticket size and whether transactions are in-person, over-the-phone or online. One key factor is time of delivery. “Take the example of a furniture store. If the time between sale and expected delivery of the furniture is six weeks, but extends to four months, chargebacks to a businesses’ payment processing account could be more common, as customers might change their mind and make a return, increasing risk,” says Thames. “Alternatively, a restaurant would have immediate delivery, a more constant average ticket size and consistent total processed volume—lessening overall risk.”

Processors are also likely to view so-called satisfaction-based businesses as riskier. “Photographers, event planners and makeup artists are good examples of this. If customers are unsatisfied with what they paid for, they may dispute the charges, which puts the business owner at a loss for the funds, after having already provided the good or service,” she says.

Costs and setup

So how does this affect what you’re charged? MCC categories are very specific and will affect pricing and rates. “Account setup needs to be right the first time to alleviate holds and ensure best pricing and lessoning the need for frequent account reviews,” says Thames.

Thames explains that all transactions will have associated costs. These come in the form of an interchange rate, a percentage of basis points and possible per-transaction fee—all of which are relevant to your industry, MCC and chargeback risk. Interchange rates are tied to the card being used for payment and the card networks. The percentage and per-transaction charges are tied to your payments processor. The MCC your business is assigned, then, has a big impact on the rates you’re charged each time you process a customer payment.

While this has tangible effects on your business, the process of MCC assignment is primarily handled by the processor, largely driven by rules of standard internal risk management and the card networks. This means that there are no costs to set up your business’s MCC code. “It’s not like going to the courthouse to establish and register a business license or articles and paying a fee. The payments processor will complete this as part of their standard process,” says Thames.

Even though business owners don’t determine their own MCCs, knowing and understanding your business’s MCC is valuable. The one chosen can affect your payment processing costs, account risk rating and pace of reviews, and may, in some cases, determine if a cardholder can use their card type at your business.