When you apply for a merchant account for your business, a credit card company evaluates the products you sell or the services you offer. In return, you’ll get a merchant category code assigned to your business. A merchant category code, more commonly called an MCC, uses a single four-digit number to identify your company’s purpose for business.
So what is an MCC used for and what does it mean for you and your business?
Every year, businesses must report payments for services to the Internal Revenue Service (IRS) using Form 1099. However, companies don’t need to create the same form for products purchased during the year. For example, you wouldn’t create a Form 1099 if you buy a new computer for your company; if you pay someone to install that computer, however, you’re required to generate this form to record payment details for that service.
In fact, you must create a separate Form 1099 for every business that provides you with services. Without a reliable method to record these purchases as they happen, you would have to check each line item on your expense sheet when you calculate your taxes.
Here is where MCCs come into play. Developed in 2004 to make tax reporting easier, MCCs allow companies to record each outgoing payment to make separating the cost of services from the cost of goods easier, faster, and cheaper.
Since 2004, the credit card industry has found some other ways to use MCCs — most of them involve evaluating the risk associated with each account. Naturally, if your business receives an MCC that’s considered a low-risk category, you will pay less in fees and have fewer restrictions than if your processor assigns your account to a high-risk category. If your assigned level of risk is high enough, some credit card processors may not work with you, and you may have to turn to a provider that specializes in a high-risk merchant account service.
How is the risk level assigned to each MCC? The credit card industry considers several factors by business category, including the following:
For example, if you open a corner market in your neighborhood, the credit card network may tag your account with MCC 5499 as a convenience store. This category is a relatively low-risk category for the merchant provider since your business will likely sell inexpensive items to customers who swipe their cards and approve the purchases in person.
However, if you create a new online poker site that charges members to play and offers cash prizes, that business would most likely receive MCC 9754 for non-face-to-face gambling. In this case, the code signifies a high-risk category, as the gambling industry traditionally records a high number of chargebacks and fraudulent charges due to online payments.
Even if your company doesn’t report any complaints or chargebacks, your business could still be viewed as a high risk based on the activity prevalent in that industry. While merchant account processors consider your business’s individual history, MCCs rely on statistics for classification purposes.
An inaccurate MCC can cost your business money. If you’re assigned a higher risk than your business deserves, you may pay higher interchange fees, your processor may require a rolling reserve, you may not be able to open a merchant account, or you might have to get a high-risk merchant account to conduct business.
Incorrect MCCs can affect your customers, too. Many credit card companies offer bonus frequent flyer miles, bigger cash-back bonuses, or other benefits for buying gas or groceries with their cards. If you sell fuel, but your MCC indicates you sell cigars, your customers might miss out on these opportunities.
Don’t misrepresent your business to get a better MCC. Falsifying your business status can result in substantial fines, loss of your merchant account altogether, or placement on an industry blacklist that could prevent you from opening a new account in the future.
By evaluating the products you sell or the services you offer, credit card processors can assign your business an accurate MCC that not only assesses the risk they will assume by working with you, but also ensures you will pay a fair rate for the services that these providers offer.