The mystery behind rewards on your credit card transactions

Ever curious about how credit card companies decide on the reward points for various transactions?

For example, some purchases with your credit card earn you points, but rent payments usually don't. This isn't random; there's a specific system behind it. Whenever you use your card, the system immediately checks the transaction type and determines any applicable rewards. This decision is based on what's known as the MCC. Let's dive into this mechanism.

What is MCC?

The Merchant Category Code (MCC) is a four-digit number that credit card companies use to categorise a merchant's type of business. Assigned by the International Organisation for Standardisation (ISO), these codes are crucial not just for businesses but also for consumers. They play a big part in setting the Merchant Discount Rate (MDR).

And what about MDR?

MDR is a fee that merchants pay to accept payments via credit or debit cards, calculated as a percentage. The rate varies depending on the merchant's MCC, affecting different types of businesses differently. For example, educational services might be charged about 1% MDR, while grocery stores could see rates around 1.3%.

Here's how MCC affects your rewards

Not all purchases with your credit card will earn you the same rewards. Take the SBI Card, for instance; it offers 5% cash-back on online purchases, 1% on utility bills, and nothing for rent or government payments. Credit card issuers use the MCC to figure out the merchant's category and then apply the rewards.

An MCC reflects the primary category in which a merchant does business and may be used:

?? ???? ?????????????????? to determine the interchange fee paid by the merchant, with riskier lines of business paying higher fees.

?? ???? ?????????????? to offer cash back rewards or reward points, for spending in specific categories.

?? ???? ???????? ???????????????? to define rules and restrictions for card transactions [e.g. Automated Fuel Dispensers MCC 5542 have specific rules for authorisation and clearing messages].

?????? ?????? ?????????????????????? to determine whether a payment is primarily for services, which needs to be reported to the RBI for tax purposes

What if a merchant has the wrong MCC?

Sometimes, a merchant might end up with the wrong MCC, either due to an error by the payment gateway provider or incorrect information provided by the merchant to get a lower MDR. This can impact both the merchant and the customers.

For instance, the cash-back you get might be based on the merchant's category code, which could be incorrect.

Conclusion

It is thus important for payment service providers (PSPs) to onboard merchants who have a legitimate MCC code to ensure that the PSPs do not face any legal fines and punishments and also prevent fraudulent transactions as a result of onboarding illegitimate merchants