What is a Merchant Category Code (MCC)?

Emily VuittonBusiness5 Comments

MCCs explained

We see you as the unique individuals you are. That’s why we made the Chargeback App flexible to fit the needs of your business and internal teams. But what helps the card networks define you is called a merchant category code (MCC). Sometimes this is incorrectly referred to in casual conversation as an MCC code (kind of like how some people refer to ATMs as ATM machines). Basically, this merchant code helps categorize you within a sea of data. So it’s crucial to include this code in retrieval requests and dispute responses. Also, a merchant category code can impact what evidence is needed in your response. In conclusion, the more you understand about your MCC, the better. Get to know what your MCC means. It will have a significant impact on how you operate your business.

Let’s take a look at some of the other reasons why the merchant category code is important.

New call-to-action

Created by the IRS…

According to the IRS, a merchant category code (MCC) is defined as:

“A classification code that is assigned by a payment card organization to a merchant/payee. The payment card organization assigns the merchant a particular code based on the predominant business activity of the merchant.”

MCCs were established in 2004 by the Internal Revenue Service (IRS). Its purpose is to streamline 1099 reporting for commercial cardholders. In other words, it classifies businesses into specific market segments. In addition to that, here are a few other things you should know:

  • The IRS requires businesses to provide year-end 1099 forms containing payments made for services.
  • Payments made for goods do not need to be included on a business’ 1099.

Before 2004, the IRS lagged behind in knowing which transactions were tied to which good or service. Instead, they relied on merchants to make this distinction. Even with this apparent advantage, it still involved sorting through large volumes of transactional data. It was a dark time for many of the parties involved, but not the worst time. Now things are much easier as commercial cardholders simply need to reference the MCC of a business. And that determines if the purchase needs to be included on their 1099 form.

You can find a full list of merchant category codes provided by the IRS here. There’s a lot to see on that page, so simply use ‘ctrl/cmd + F’ and type in ‘merchant’ to get to what you’re looking for. That’ll bring you directly to the relevant sections of the merchant category code listing.

… Now Used for Much More

MCCs are now utilized by several parties. Some of those parties include acquirers, card networks, payment service providers, merchants, and consumers. Now let’s look at some of reasons why each party uses MCCs:

  • Acquirers use MCCs to identify prohibited business types. They also measure the risk before working with a merchant.
  • Visa, MasterCard, American Express, and Discover use MCCs to determine the interchange fees merchants are charged.
  • Merchants with certain MCCs will be denied services from some payment service providers.
  • A merchant’s ability to charge convenience fees and other similar options is based on their merchant category code.
  • Only merchants classified with healthcare MCCs are allowed to accept HSA and FSA cards.
  • Credit card rewards or points accumulated by consumers on specific category purchases are typically calculated using MCC.

How Acquirers Assign Merchant Category Codes

The Visa Product and Service Rules outlines responsibilities that acquirers have with merchants. It explains how acquirers must assign an MCC to a merchant outlet. And they need to assign the most accurate MCC to describe its business. Furthermore, an acquirer must assign two or more MCCs to a merchant outlet if:

  1. The merchant outlet has deployed an Automated Fuel Dispenser. And it sells fuel or other goods/services in a face-to-face environment.
  2. Separate lines of business are located at the same merchant outlet. And one or more of the following applies:
    • A separate merchant agreement exists for each line of business.
    • Multiple merchant outlets on the same premises display different merchant names.
    • One of the lines of business is designated by Visa to be a High-Brand Risk Merchant.
    • An electronic commerce merchant outlet contains a link to a separate electronic commerce website. And each website qualifies for a different MCC.

High-Brand Risk MCCs

US acquirers are required to register and monitor its High-Brand Risk merchants. This is a requirement set by Visa. Acquirers will submit these reports to assess whether merchants are involved in unusual activity. In addition, acquirers are required to keep track of the metrics from each High-Brand Risk merchant.

High-Brand Risk Merchants/MCCs include:

  • 5962 (Direct Marketing – Travel-Related Arrangement Services)
  • 5966 (Direct Marketing – Outbound Telemarketing Merchants)
  • 5967 (Direct Marketing – Inbound Telemarketing Merchants)
  • 7995 (Betting, including Lottery Tickets, Casino Gaming Chips, Off-Track Betting, and Wagers at Race Tracks)
  • 5912 (Drug Stores, Pharmacies)
  • 5122 (Drugs, Drug Proprietaries, Druggist Sundries)
  • 5993 (Cigar Stores and Stands), for Merchants that sell cigarettes in a Card-Absent Environment

Your MCC and Chargeback Responses

The MCC assigned to your business impacts a chargeback. It also impacts the evidence to disprove a chargeback. And its impact can vary from one card network to another. Some of Visa’s most common dispute reason codes are adjusted to specific MCCs.

At this point, I’d like to emphasize something important. These adjustments should not be confused with the conditions based on the merchandise or services being sold. There are other factors that go into that calculation. Some conditions aren’t solely based on MCC. Instead, it’s based on the nature of the transaction or provided goods. Let’s look at one example. Visa reason code 13.3 includes chargeback rights and limitations based on the product type instead of only MCC:

Merchants who represent that they recover, consolidate, reduce or amend existing financial products or services, including:

  • Debt consolidation
  • Credit repair/counseling
  • Mortgage repair/modification/counseling
  • Foreclosure relief services
  • Credit card interest rate reduction services

For reason code 13.3, the chargeback applies to any merchant described above. That’s regardless of any MCC. But merchants with specific MCCs are referred to this reason code too. Chargebacks categorized under reason code 13.3 apply to “outbound telemarketing Merchants”. [MCC 5966 (Direct Marketing – Outbound Tele)].

A summary of reason codes that include adjustments based on MCC is detailed in the table below:

MCCs Impacted by Reason Codes
Visa Reason Code Impacted MCCs Details Regions
13.3 – Not as Described or Defective Merchandise/Services 5966 (Direct Marketing – Outbound Tele) Dispute Condition 13.3 – The Chargeback Applies All excluding
Europe
11.3 – No Authorization 4784 (Tolls and Bridge Fees)
7523 (Parking Lots, Parking Meters and Garages)
Dispute
Condition 11.3 – Invalid Chargebacks
Europe
11.3 – No Authorization 3501-3790 (Hotels/Motels/Inns/Resorts)
7011 (Hotels, Motels, and Resorts)
3351-3441 (Car Rental)
7512 (Car Rental Agencies)
4411 (Cruise Lines)
Supporting Documentation/
Certification
All
10.3 – Other Fraud – Card-Present Environment 5815 (Digital Goods – Media, Books, Movies, Music)
5816 (Games)
5817 (Applications [Excludes Games])
5818 (Digital Goods – Large Digital Goods Merchants)
Supporting Documentation/
Certification
All excluding
Europe

Verified by Visa Chargeback Protection Limitations

It should be understood that not all transactions are eligible for protection. For instance, merchants with certain MCCs do not have their ecommerce transactions protected from  10.4 – Other Fraud – Card-Absent Environment. US acquirers will need to notify Verified by Visa merchants of this limitation. Moreover, Verified by Visa does not extend protection if merchants are classified under these MCCs:

  • 4829 (Wire Transfer Money Orders)
  • 5967 (Direct Marketing – Inbound Teleservices Merchant)
  • 6051 (Non-Financial Institutions – Foreign Currency, Money Orders [not Wire Transfer], Stored Value Card/Load, and Travelers Cheques)
  • 7995 (Betting, including Lottery Tickets, Casino Gaming Chips, Off-Track Betting, and Wagers at Race Tracks)

Your merchant category code influences many aspects of doing business. And dispute management is no exception. Always do your due diligence in researching what’s required for your dispute responses. That way, your responses always include the compelling evidence required by Visa. This is just a sound business practice. It’ll be great on your end to look at what the Chargeback App has to offer. Our response templates are practically an expert DIY-guide. Its auto-script will show you where your MCC should be written in your response. And it will guide you further in knowing how to craft a compelling response. Find out more about the benefits of the Chargeback App right here.

New call-to-action