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Understanding merchant category codes (MCC codes)

Understanding merchant category codes (MCC codes)

Do you know your business's merchant category code (MCC)?

Your MCC code has two significant impacts on your business: the pricing or interchange discount, and the risk profile associated with your merchant account. It will also determine how your customer’s purchases will be classified into spending categories which will impact credit card rewards points they receive when buying your goods or services.

Understanding MCC codes and how they work can make your life easier as a business owner. This four-digit number can help with everything from reporting to preventing chargebacks. It even acts as an extra layer of fraud protection.

MCC codes are a big deal if you're running a business that accepts credit and debit cards. Here's everything you need to know about merchant category codes and how to make them work for your business. 

In this article, you’ll learn:

  • What an MCC code is
  • How MCCs could impact your business
  • How to find your own MCC code

What is an MCC code?

A merchant category code is a four-digit code credit card companies use to classify businesses by the types of goods or services they provide. These codes were created in 2004 to simplify 1099 reporting, but they’re also used to set interchange rates and determine reward points for customers. 

MasterCard, American Express, Visa, and other payment brands use these codes to categorize purchases and gather information about cardholder purchases. 

Your business can use MCCs to determine which transactions need to be reported to the Internal Revenue Service (IRS). MCCs are particularly useful because services need to be reported to the IRS but products do not. There’s a code for drug stores (5912); one for wrecking and salvage yards (5935); and others for fast-food restaurants (5814), office supplies (5111), and family clothing stores (5651). In total, there are about 500 MCC codes. Aside from reporting, MCCs also determine the interchange fees that your business will pay for accepting credit cards. A business with a higher risk profile might pay higher interchange fees than one with a lower risk profile. Your business much be classified with the most appropriate code for your product or service. 

Who creates the MCC codes?

Credit card networks set merchant category codes. Here are the main payment brands behind these codes:

  • Visa
  • MasterCard
  • Discover
  • American Express

Card networks add, eliminate, or change codes regularly, so you want to make sure you check that your business is assigned the correct code. They use an individual four-digit number for every type of business activity. 

The MCCs are grouped into general categories, such as transportation services, miscellaneous stores, and utility services. These general categories are assigned a range. Here are some examples of MCC codes:

Retail outlet services have MCCs ranging from 5000 to 5599. 

Retail outlet services MCC codes

Professional services and membership organizations are given MCCs between 8000 and 8999, and government services fall within the 9000 to 9999 range. 

Professional services and membership organizations MCC codes

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Do credit card companies use the same MCC codes?

Credit card companies don’t always use the same MCCs. There’s no standard list, although most of the major credit card networks use the same codes. 

Fortunately, it’s not up to your business to apply the right codes when your customers make card purchases. Your payment processor will handle that. 

But it is your responsibility to ensure the codes being used for your business are accurate. If they’re not, you could run into problems like higher transaction fees. 

How MCC codes impact your business

Your merchant category code is like a data tag for your business. You want to check that it’s the right four-digit number so you can reap the benefits and avoid being overcharged. 

You can also use MCC codes to help with compliance reporting. Let’s take a look at the different ways these codes impact your business and how you can use them to your advantage. 

Interchange rates

Credit card issuers use the MCC to group merchants and assign interchange rates, which are the fees you have to pay for every credit and debit card transaction. 

The interchange rates vary based on several factors.

  • Risk is one factor. A business in a high-risk category, such as gambling, pays a higher interchange fee than one in a low-risk category, like a bakery.
  • The number of transactions also matters. Retail stores, for instance, will pay lower transaction fees than airlines because they have a higher transaction volume. 

As a business owner, you should verify that your business is assigned the correct MCC to ensure you’re paying the right interchange fee. 

Credit card rewards

Having a categorization system helps credit card companies determine rewards for customers. For instance, you might get 5% back for transportation services. That means whenever you make a card purchase for a merchant with an MCC code for transportation services, you’re automatically eligible for rewards.  

By understanding MCC codes, you can check to ensure you’re getting rewarded for the purchases you put on your business card. 

Fraud protection

When transactions are categorized properly, it’s easier for your credit card company to identify suspicious activity or fraudulent payments. Your payment processor can automatically flag high-risk transactions that might require an extra security check based on that handy little MCC.

Tax reporting

If you use your business credit cards for all your purchases, you can streamline your year-end accounting for the 1099 form.

Your company has to report transactions with services to the IRS. With MCCs, all you have to do is look at your past credit card statements for the year to find out which transactions are classified as services. 

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How to find your business’s MCC

You won’t find your MCC code on any statements or bills. Instead, you’ll need to call your payment processor and ask them what code is assigned to your business. They’ll let you know what code is being used, and it might not always be obvious. 

The merchant category code is assigned based on the primary business activity, but some companies offer products or services that cross into multiple categories. For example, a bookstore that doubles as a coffee shop or a movie theater that serves dinner. 

If you believe you have the wrong code, let your payment processor know. You don’t want to be misclassified as a high-risk business or over-charged for credit card transactions. 

Manage all your payments in one place

Understanding merchant category codes can help you organize and report your business payments made with a credit or debit card. But you also need to track check payments, international wire transfers, and other types of financial transactions. 

BILL lets you keep all your invoices, payment history, and other financial information in one place. It can also track everything from credit card purchases to ACH payments. Try BILL today and make organizing your payments a breeze.

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