How Merchant Category Codes Determine Merchant Status

Today, more and more businesses are selling online. They can be one-person operations that ship goods from home, or large companies that sell all sorts of product groups. Despite the size of the business and the turnover, all sellers sooner or later have to deal with chargebacks and the problems that come with them. To make it easier for banks, card networks, and other financial institutions to handle such processes, it’s important for each merchant to report what kind of business they are doing. This way, everyone understands what’s going on and can work together to resolve any issues that come up.

Merchant category codes (MCCs) are created to avoid confusion and simplify the process of identifying the type of business a seller is conducting. Though sellers rarely give consideration to what kind of MCC they have, this code is assigned to them when they open their merchant account and is primarily important to the IRS and payment processors. There are some MCC assignments that can have limitations or advantages for sellers.

What are Merchant Category Codes?

The merchant category code, or MCC, is a four-digit number that’s assigned to every merchant account during the registration process. This number tells card networks what type of goods or services are being sold. Recognizing the value of an MCC allows card networks to get complete information about a transaction and understand how to process it. For example, by knowing the type of goods or services being sold with an MCC, tax authorities can determine what taxes to charge on a particular transaction.

How are Merchant Category Codes assigned?

Credit card networks determine merchant category codes (MCCs). A merchant account can have more than one MCC, depending on the products or services they sell. Different networks may define merchant services differently and assign other merchant category codes accordingly.

For example, a small online store might have MCC 5945 (Hobby, Toy, and Game Shops) to Visa and MCC 5970 (Artist Supply Stores, Craft Shops) to Mastercard.

When a merchant needs to classify multiple parts of his business under different card networks, he may have difficulty if those networks have different standards and rules. For example, Visa may have assigned two MCCs to a merchant’s business, while MasterCard has only assigned one.

Once an MCC is assigned, it stays with the merchant even if the business type changes completely. Some merchants try to change their MCC, but this process can be quite time-consuming on the part of the card networks.

Do Merchant Category Codes affect chargebacks?

Every seller of goods or services has probably encountered a chargeback at some point – but did you know that the type of business you have (as classified by your MCC code) can actually influence which chargeback reason codes are used against you, as well as what kind of evidence you’re allowed to use to fight them?

Managing chargebacks effectively starts with knowing your MCC and researching possible dispute scenarios. You can also use a chargeback management company that will help decrease the risk of chargebacks through their software. This software not only helps prevent chargebacks, but also increases ROI.

The Bottom Line

Working with high risk merchants can be a challenge, but it’s important to make sure that your merchant category code is in the safe group. You should also find out if there are any special rules or conditions for using your MCC, increased interchange fees, etc. This will help you work more efficiently and deal more effectively with chargebacks.

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