The basic principles of determining which MCC to use.

Every merchant that registers their business will have to go through a series of legal procedures to be listed and connected to the financial and commercial system at large. The spread of globalization has led to the need for developing a unified system of merchant identification, or – more importantly – categorization of their types of activities.

This is where the MCC, or Merchant Category Code, comes into play as a four-digit number listed in ISO 18245. The given codes identify merchants by their type of activity and allow financial service providers to track and classify transactions based on their aim.

The MCC – The Who And Why

A Merchant Category Code is assigned by a credit card issuer as a four-digit code for categorizing transactions users carry out with any particular card at various merchant outlets based on goods and services. Tracking transactions and restricting others becomes possible thanks to the identification and proper assignment of these codes.

The uses for MCCs are many, including tax reporting, card payment tracking, promotion proposals, informational and statistical data gathering about card users, merchants, and many other metrics.

The codes themselves are developed and listed by such credit card payment providers as Visa, MasterCard, American Express, and others. The responsibility came into force as of 2004, when the US Internal Revenue Service placed that burden on card scheme operators. Not all codes are recognized by all card issuers, however, as the list is often updated with multiple codes being reassigned, eliminated, or added.

For example, the following is a list of some codes and their corresponding categories of business activities:

  • MCC 5816 Digital Goods: Games
  • MCC 7399 Business Services
  • MCC 5411: Grocery Stores
  • MCC 5941: Sporting Goods Stores
  • MCC 4722: Travel Agencies, Tour Operators

The list is extensive and exhaustive, allowing virtually every type of business to be included in the economic system and tracked based on the transactions being carried out through it. The Visa Merchant Data Standards Manual is an excellent source for the lists of MCCs currently in use.

It is important to note that MCCs are often used to identify and block transactions within some prohibited industries that may be illegal in some jurisdictions. Essentially, MCCs allow processors to stop transactions from going through if they are being directed at some merchants providing illegal services within a country.

For instance, MCC 7995 – Betting, including Lottery Tickets, Casino Gaming Chips, Off-track Betting, and Wagers, is illegal in some countries. As such, once a transaction processor receives a payment request to an MCC 7995 merchant from a country where betting is illegal, the transaction will simply be declined.

The main beneficiaries of the use of MCCs

Issuers are MasterCard, Visa, and other payment processors that provide MCCs to merchants to determine transaction types. Apart from identification of types, they also use the data to determine credit scores to decide whether it can be approved or declined based on the availability of credit on the card and the risks involved.

Consumers receive benefits from MCCs by gaining access to various rewards, promotion programs, and bonuses that are accrued based on the type of transaction processed.

Acquirers use MCCs to categorize their type of services provided as part of their portfolios. Some merchants may be classified under several MCCs to match the categorization principle of the acquiring service. However, misclassification can lead to fines and penalties.

Merchants receive the benefit of accessing proper and accurate interchange rates once they are properly classified under the correct MCC. Incorrect classification will lead to higher fees, as each MCC has its own rates assigned. In addition, some MCCs may have restrictions attached, making correct classification not only a legal matter, but one of profitability as well.

Choosing The Right MCC

The correct choice of MCC has a direct impact on the effectiveness of payment processing. The MCC corresponds to the merchant’s “predominant business activity” and has to be assigned accordingly to avoid unnecessary fees and possible sanctions on the part of payment scheme operators.

Interchange Rates

The bank card brands and payment processors like Visa and MasterCard rely on MCCs for determining the interchange rate. The given rate represents the wholesale price consumers and merchants pay when the credit card is processed. As such, the MCC determines the rate, varying slightly between brands. Interchange fees will be higher per transaction for high-risk industries, since they have higher chargeback rates.

High-Risk Industry Identification

Card scheme operators use MCCs to identify transaction destination industries and prohibit their processing if the merchant is either illegal or banned in a specific jurisdiction.

Bonuses And Rewards

Bonus points and rewards that get accrued on credit cards for their usage at different locations are determined based on the MCC of the merchant, where the transaction was processed. The accrual is automatic, and most bank card operators provide lists of venues that can yield bonuses for buyers. Once again, proper MCC listing is vital for merchants to have their clients qualify for stipulated reward programs.

Convenience Fees

Some MCCs charge convenience fees – a small markup that is added to the price of a product or service that is paid for using a credit card, as opposed to a “preferred” means of payment like cash.

Getting the MCC correctly can considerably lower business operating costs and processing fees for some types of organizations that have high turnovers. For example, Visa and MasterCard have rather favorable terms for “emerging markets” that have historically been more inclined to using cash, instead of cards, and are gradually embracing contactless payments.

In Fintech

MCCs are present in every industry, and fintech is no exception. The basic principle of determining which MCC to use within a service employment fintech or integrated finance is “predominant business activity”. 

Back in 2018, VISA and MasterCard reclassified their MCCs for the purchase of cryptocurrencies based on specification for the cryptocurrency indicator field. The latter is 6051(Quasi Cash), which indicates whether a transaction is being carried out for the purpose of purchasing a cryptocurrency. Some banks, mainly in South-East Asian or Latin American countries, are considering this code as a negative one. For instance, if the code was previously used for scamming people or caused a high number of chargebacks, the bank will eventually ban all the operations connected to it. In some cases, the banks simply cannot work with this code at all, as they lack the necessary infrastructure or protocols, so they have no other option but to decline such transactions.

All other businesses that are classified as financial institutions or providers of financial services must apply Merchant Category Code 6012 (Financial Institutions) and are subject to financial reporting. Crypto-related businesses that have a license for emitting digital wallets use this code for fiat balances top-ups. 

Generally speaking, MCC 6012 turns out to be more effective when it comes to processing crypto transactions. If you happen to have has access to crucial infrastructure with licensed companies, you will be able to process crypto purchasing transactions using the MCC 6012 code, fully legally and without any dodgy coding techniques. 

General Advice

“Declaring one type of transaction with a specific MCC and actually processing the other one instead, aka miscoding, is illegal, and I would never recommend it. Dealing with constant declines as crypto-related MCC happen to fall into disrepute can be overwhelming for any business. Luckily, there are rightful ways to avoid this issue.

What you can do is to split one transaction into two. The first step, fiat to crypto flow, would involve topping up a user’s fiat balance, which basically means that a user will have an additional fiat balance in their crypto wallet. Then the second step would be to exchange the necessary amount of fiat assets to cryptocurrency independently, without using card processing whatsoever,” – concludes Arthur Firstov, Mercuryo’s Head of Sales.