Products and services come in a dizzying array of types. To minimize the potential for confusion, the payment processing industry has agreed on the practice of categorizing goods, services, and the types of payments that are processed millions of times every day, by businesses across the country.
As an entrepreneur yourself, it is in your best interest to understand what is known as merchant categorization codes (MCCs).
What is a merchant category code?
A Merchant Category Code (MCC) is a four-digit number assigned to businesses by credit card networks, to classify the type of goods or services they provide. MCCs are used to determine how transactions are processed, identify eligibility for specific rewards or cashback programs, and assist with financial reporting or tax categorization.
They are particularly useful for banks, businesses, and consumers looking to track spending patterns or enforce spending restrictions in certain categories.
Example of a merchant category code.
A real-life example will help you to understand the power of MCCs both for you and your customers.
Let’s say that you sell apparel over the internet. As such, your business could be given the MCC of 5691, “men’s and women’s clothing stores.” With this information in hand, your payment processing provider will be able to categorize and manage the transaction.
Additionally, your customer can easily recall your business type when reviewing their credit card bill, reducing the chances that they will be confused and initiate a costly chargeback.
Applying a merchant code to your business.
Categorization occurs upon initial setup of your account. Be sure that the chosen code reflects the true nature of your business.
Your MCC is assigned by your merchant services provider when you first set up your account. It is your responsibility to review your designation to ensure that it reflects the true nature of your business.
This is especially true if your business is high-risk. If you misrepresent the products you sell, either intentionally or due to an oversight, you could be subject to financial penalties or account closure down the line.
It is also important to know that MCCs are not static; they can change over time. Keep checking with your high-risk payment provider to guarantee that your MCC is up-to-date.
Why are merchant category codes important?
MCCs perform many valuable functions. They aid in assessing credit risk, help merchants secure fair fees and processing rates, protect against fraud, aid during tax time, lead to better rates and more efficient accounting procedures, and furnish valuable data insights.
For processors and businesses alike, MCCs provide numerous advantages. When transactions are accurately categorized, it becomes a lot easier to detect those that are beyond the pale.
Navigating the complexities of tax time and industry regulations is also made easier when vendors and services are precisely classified. Payments generally come in faster and in the right amounts, optimizing bookkeeping. MCCs even facilitate your loyalty program’s effectiveness, assisting with determining which transactions can earn points or rewards.
Finally, chargeback rates can be reduced, especially in high-risk and hard-to-place businesses. With these companies, customers might be more likely to be confused about the nature of the charges they see on their bills, a situation that MCCs can mitigate.
When your MCCs are in line with your company type and the products you sell, you can streamline the full array of business processes.
This includes everything from streamlined reporting and performance metrics, to increased personalization and an elevated shopping experience. Although they exist behind the scenes, MCCs are one of the most powerful elements of the smoothly operating machine that is your business.
