What Is A Merchant Category Code (MCC)?

A merchant category code, or MCC, is a four-digit number assigned to your business that defines what products or services you offer. If you do not already have a number assigned to your business, you will be assigned one by the credit card associations when you’re approved for a merchant account and begin accepting credit card payments.

Merchant category codes actually have an interesting history. These codes were originally created in 2004 as a way to sort businesses by market segment for IRS tax purposes. This distinction is important because the IRS does not require you to report the purchase of goods for your business, even if the goods are not for resale. But you are required to report payments made for services.

For example: if you purchase cleaning supplies for your office, you don’t have to report that purchase. But if you contract with a maintenance service to come in every evening and clean up your office, you are required to report those payments to the IRS on a year-end 1099 form.

At year end, a quick review of the MCC’s of the companies you have made payments to will help you determine which business purchases are exempt from taxes and which payments must be reported. The implementation of assigning merchant category codes has certainly simplified 1099 reporting. But how and why are they used in the credit card processing industry?

The How.

Credit card processing companies and other merchant account providers use merchant category codes to identify high-risk businesses. A business can be classified as high-risk for several reasons, including the financial stability of the business and/or owners. But they use MCC’s to determine if a business is high-risk due to the nature of the business, based on their products and/or services.

Some high-risk businesses include:

  • • Companies that sell adult products or provide adult services.
  • • Companies that provide travel services.
  • • On-line gambling sites.
  • • Companies with automated, recurring billing for annual memberships (i.e. on-line dating services, or fitness centers).
  • • Telemarketing companies.
  • • Companies that only sell a few high ticket items.

The Why.

Though high-risk businesses may actually be very profitable, they often have a higher number of chargebacks, a disproportionate ratio between sales volume and available cash, or a higher risk of fraudulent charges. Any one of these complications poses certain financial risks for the credit card processing company or merchant account bank, as well as the issuing bank involved in processing their credit card transactions. Credit card processors rely on MCC’s to establish the nature of a business, and to determine if they need to charge higher transaction and service fees to cover the increased risk for any financial losses.

Merchant category codes provide positive information to credit card processors as well. The cardholder’s issuing bank can use merchant category codes to determine the types of store, restaurants, entertainment events, etc. their customer usually frequents. This information is used for marketing purposes. It also can be used to prevent fraud. Merchant category codes from businesses that are outside a cardholder’s normal selection of shopping venues may raise a red flag at their issuing bank. This early warning signal can save both the seller and the cardholder lots time and money.

If you own or operate a business that’s considered high-risk, you may have a little more trouble finding a credit card processing company or bank willing to handle your account. But there are processors that specialize in managing businesses classified as high-risk by their merchant category code. Just be prepared to pay higher fees for the service.