Unlocking the Potential of Merchant Category Codes (MCCs)

You may not be aware of Merchant Category Codes (MCCs) if you are a business owner. MCCs are codes which are allocated to businesses in keeping with their sector or type of business. They are used by different bodies to decide how a specific business is managed. It is crucial for acquirers, banks, and PSPs to comprehend MCC and how its utilization can affect their business. There are 69 industries and 158 sub-industries within the 11 global business sectors, and numerous businesses within those industries and sub-industries. Knowing your MCC can help you to take more informed business decisions. In this article, we will be examining what MCCs are, how they work, and how MCC is used by banks, merchant acquirers, and card schemes.

What Are Merchant Category Codes?

Merchant Category Codes (MCCs) are four-digit codes that identify the type of business a merchant operates. Originally created in 2004 to streamline US?Internal Revenue Service?reporting,?MCCs?are now used for a number of different purposes. Card brands such as Visa, payment processors, and even the IRS use MCCs to identify the type of business they’re working with.

The Merchant Category Code Index is vast and complex. It consists of hundreds of different codes for almost every type of business. There are generic codes, subcategory codes and specific criteria that must be met for each code. ?For instance, 4722 is the MCC for travel agencies and tour operators, such as those that book accommodations for travelers, while 7011 is the code for Lodging (Hotels, Motels, and Resorts). Major companies such as Hyatt have their own personal MCC (3640), as do many other large companies.

The following are some examples of how merchant category codes are commonly used by issuers, acquirers, card schemes, payment service providers, & IRS.

• A consumer who has a credit card that offers 4% cashback on airline purchases should be able to use the reward for any purchase that is classified under Merchant Category Code 4511, which encompasses airlines and air carriers.
• A petrol station classified under the MCC may pay a different interchange fee to its credit card processor than a vehicle rental firm listed under the MCC.
• If a business uses a credit card to make a purchase, they must report the service purchase to the IRS in order for the IRS to confirm that the services are paying all necessary income taxes. MCCs (Merchant Category Codes) can aid businesses in determining whether the transaction is classified as a service.

Every industry has its own set of transaction patterns and levels of risk (potential for fraud). MCC codes are used by issuing banks to determine whether to accept a transaction.?

In?brief, a merchant category code identifies the primary business category in which a merchant operates and can be used to:

• High-risk businesses are charged greater processing fees than low-risk enterprises to determine the interchange cost they will pay.
• Cashback and reward points for certain merchant categories must be updated by credit card companies.
• It is used by card networks to determine credit card transaction rules and restrictions. For example restricting corporate card transaction at spa’s and other non-travel related categories.

What is MCC Miscoding?

Even though the Merchant Category Code (MID) has been established, some merchants continue to operate legally by routing transactions of various types through it. Miscoding refers to the process of incorrectly routing transactions through the MID; for example, merchants in the gaming sector may send their gaming traffic through the gaming MID. However, Card brands have discovered that some of these merchants have been offering their products and services in countries where local laws ban such transactions or where the appropriate financial services body has severe licensing requirements. MCC mis-coding occurs when a business is classified with an incorrect code, mistakenly categorizing them into a different type of business than the one they provide. Such mis-coding can cause problems for businesses as it can lead to higher processing fees and other issues around risk classification, taxation and regulations, due to their incorrect classification.

Merchant Category Code Using Merchant’s Business Website

As an underwriter of merchant risk, it is crucial to stay abreast of Merchant Category Code (MCC) detection through website URLs, both during and after onboarding merchants for internal risk assessment. e.g. book stores, florists, etc.?Merchants choose their MCC code, but financial institutions hold the ultimate responsibility for ensuring those codes are correct.

To ensure your company is categorized correctly, you must continuously monitor merchants website; even though you may have mapped the business to the correct MCC initially, changes can occur without your knowledge. For instance, if your merchants start selling products or services that do not fit into the same category as your existing ones, then this can influence your interchange fees, and increase the risk associated with your merchant account. Therefore, it is essential to keep an eye out for any changes in the product offerings on your merchants' websites.

In the current eCommerce world, accurate classification of merchant types is essential for establishing successful customer relationships or risk assessment. This is where automatic Merchant Category Code (MCC) detection comes in.

Unlocking the Potential of Automated Merchant Category Code Detection

MCC prediction works by taking the website URL of a merchant and then mapping it to its corresponding MCC code by analyzing hundreds of data points from websites and other open-source intelligence, as well as through sophisticated classification ML algorithms. The benefits of automatic MCC detection are that businesses can quickly identify merchants and their respective industries without having to manually look up each URL. This saves time, energy, and resources, and it also helps eliminate human errors when categorizing merchants, as manual data entry can lead to inaccuracies due to typos or other mistakes. Additionally, using automated tools like these businesses can quickly identify merchants and their relevant industries for risk management, fee calculation, better targeted marketing campaigns that yield higher ROI. In conclusion, leveraging automated technology like automatic MCC detection unlocks powerful opportunities for businesses looking to maximize their ROI from their marketing efforts.

With ChargebackZero MCC Check you can

1. Make sure all merchant MCCs are accurate and up to date.
2. Terminate any businesses that are not allowed.
3. Classify merchants into different risk levels.
4. Assign personnel to more important tasks.
5. Obtain external evidence to demonstrate the legitimacy of merchant MCCs in your portfolio.

Conclusion:

As you can see from this blog post, Merchant Category Codes (MCC) play an important role in helping Issuing Banks, Acquirers and Card Schemes understand what type of goods/services each merchant provides in order to manage risks associated with processing payments from them – including fraud prevention measures, fee structures, and additional requirements needed from merchants . Merchants should always check with their banking partner(s) or acquirer(s) prior to setting up new accounts or processing payments so they know exactly what type of Merchant Category Code they are assigned so they don’t run into any issues down the line. Understanding how Merchant Category Codes work can help ensure your business runs smoothly!

If you would like to see a demo of our merchant onboarding & monitoring solution, please reach out to us @?[email protected]

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