What is a Merchant Category Code (MCC)?

Oct 5, 2023

Every business that processes credit cards has a merchant category code. The four-digit code plays a key role in credit card processing—authorizing credit cards, determining risk, transaction pricing, and much more.

Here, we’ll dive into what merchant category codes are and how they work in credit card transactions.

What is a Merchant Category Code?

A Merchant Category Code (MCC) is a four-digit code that classify businesses or merchants based on the types of products or services they offer. MCCs are primarily used by payment card networks—Visa, MasterCard, American Express, and Discover—to categorize and track transactions.

For example, retail stores have the MCC 5311 and car rental agencies are MCC 7512.

General MCC Code Categories

There are hundreds of merchant category codes that fall into several broad categories.

  • Agricultural services
  • Contracted services
  • Transportation
  • Utilities
  • Retail outlets
  • Automobiles and vehicles
  • Clothing outlets
  • Miscellaneous outlets
  • Service providers
  • Business services
  • Repair services
  • Amusement and entertainment
  • Professional services and membership organizations
  • Government services

MCCs and their definitions are set by the International Organization for Standardization (ISO). However, MCCs for each card network may deviate from those set by the ISO. For instance, Visa says it consolidates some codes to manage the number of MCCs. Because of this, MCCs may differ between card brands.

How MCCs Work

When a business applies for a merchant services account, the payment processor assigns a merchant category code based on the primary business type.

The merchant category code is part of the credit card transaction data passed to the card issuer when the transaction request is sent for authorization. The card issuer then uses the MCC as one of the factors in determining whether to approve or decline the transaction. Card networks also use MCCs for activity tracking, risk management, and reporting.

How Merchant Category Codes Are Used

Beyond identifying the type of business, MCCs have a variety of functions in credit card processing.

Charging Interchange

Interchange fees are the fees paid by a merchant’s processing bank to the cardholder’s issuing bank. Payment networks have established interchange fee structures that vary based on the MCC of the merchant.

Each MCC category is associated with a specific interchange rate or fee, which is predetermined by the card network. Some MCCs may have higher interchange fees, while others have lower fees. For example, card networks may charge higher interchange fees for transactions at merchants in MCC categories where cardholders typically receive rewards or benefits.

Identifying High-Risk Merchants

Some types of businesses have a higher likelihood of experiencing chargebacks, fraud, or other payment processing issues. The MCC helps identify these businesses.

Offering Chargeback Protection

Fraud protection may vary based on the business. Some MCCs may have higher chargeback fees because of the higher rate of transaction disputes.

Other MCCs may not have dispute protection, particularly in card-not-present transactions.

Assessing Service Fees

Only certain businesses are allowed to charge a service fee to offset credit card processing costs. Card networks use MCC to ensure only eligible businesses, which includes schools and colleges, charge the fee.

Tax Reporting

For tax purposes, the MCC can help cardholders identify transactions that should be reported to the IRS.

Determining Spending Limits and Restrictions

Card issuers can block transactions using the MCC. For instance, if a business is restricted in a certain state, the card issuer can prevent cardholders from making purchases from illegally-operating businesses.

Assigning Credit Card Rewards

Credit card rewards are based on the type of business, not necessarily the type of purchase. Credit card issuers determine whether a transaction is eligible for credit card rewards based on the MCC associated with the transaction. For instance, a credit card may offer cash back rewards on purchases at grocery stores. Groceries purchased at wholesale clubs wouldn’t qualify.

Conclusion

Your merchant category code plays a bigger role than you may realize. From calculating fees to authorizing payments, MCCs can affect your bottom line and ability to do business. You can work with your processing bank to change your code if you believe your MCC doesn’t accurately represent your primary business type.

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