How Does My Merchant Category Code Impact My Business? 

Most merchants aren’t aware that when they first apply for a merchant account to process VISA/MasterCard payments, they are assigned a Merchant Category Code (MCC) by their merchant account provider (acquirer/processor) as part of the account setup process.  Once a MCC is assigned to you by your merchant bank, it’s rarely possible to change it, though there are some exceptions to this, which we’ll discuss below. 

An MCC is a four-digit code that explains to all participants in the payment ecosystem what kind of merchant you are, from grocery store to gas station, to software as a service (SaaS) business or oil and gas wholesaler.

For more general information on MCC, view this article.

You can also see a repository of MCCs on Visa’s or MasterCard’s website.

Your MCC has two significant impacts on your business:
  1. The pricing, or interchange discount, you will be charged for processing card transactions.
  2. The risk profile of your account, i.e., how likely are merchants in your category to have higher or lower than average customer complaints, refunds, and chargebacks.

In some cases, a merchant is so large and has such a unique risk profile that they receive their own dedicated MCC; for example, United Airlines is MCC 3000.  You can see the thousands of options here.

Impact of MCC on Transactions

Over time, the risk systems built into card issuers and their processors’ systems started using MCC as a trigger for flagging and blocking transactions.  For example, MCC 7995 identifies merchants that are processing card transactions related to online gambling and casino chips.  These types of transactions would often be contested by cardholders after the fact, either due to buyer’s remorse or fraudulent activity.  As a result, many issuing banks and their processors started blocking any transaction in the 7995 MCC.  As of August 2020, it has one of the lowest approval rates in the network, averaging around 53% approval (47% declined). 

In the early 1980’s it was prevalent for some merchant banks to miscode a merchant at setup to gain a higher approval ratio, or lower interchange rates, for their merchant.  Especially was this the case if the merchant had a very high volume of transactions, or if the merchant was willing to pay significantly higher rates for this miscoding, making them very lucrative for the bank.  In the early 1990’s MasterCard began actively policing their network for miscoded merchants and started imposing significant fines on any merchant bank found to be deliberately miscoding a merchant, including complete suspension of their license to provide merchant accounts.  Today, it is rare for any merchant bank to deliberately miscode. 

Why You Need to Care About MCC 

It’s important to understand the reason why it matters which MCC you have. For example, the average approval rate on cards processed under 5734 (Computer Software Stores) is significantly higher than in 5968 (Direct Marketing – Continuity/Subscription Merchant).  Why?  It’s because many merchants who have high refund and chargeback rates are under MCC 5968, and issuers have responded by assigning a higher risk score to those transactions, resulting in higher decline rates.  In fact, the average decline rate on a transaction processed under 5968 is a whopping 259% higher than the same transaction processed under 5734.  That’s 3.5 times higher decline rates, just for being in a valid, but less than ideal, MCC. Many merchant banks assign a MCC to a merchant based solely on what one will allow them to process with lower interchange fees.  However, any merchant would gladly pay an extra 5 bps in processing fees to realize an additional 1300 bps in revenue from their customer base.

It’s important to note that issuers and their processor assign a baseline risk rating to a new merchant account according to their MCC, the overall risk profile of their merchant bank, and other factors. Over time as the merchant processes more transactions, the systems learn what the risk profile is of that individual merchant, and it’s common for approval rates to shift significantly.  For example, the New York Times processes its transactions under 5968, and they average a 93.4% approval rate. This approval rate is much higher than the average performance of a much lower risk MCC. 

There’s a cautionary tale in this data.  If a merchant runs into trouble with customer complaints, decline rates can soar.  The risk systems at the issuing processors are quick to react to negative data and slow to respond to positive data.  We’ve seen examples of a merchant selling subscriptions to a digital service that ran into a problem with a fraud ring running bad transactions through their website’s signup page.  The risk systems at the issuing banks reacted within 30 days to raise the average risk rating of that merchant’s transactions. As a result, their average decline rate increased more than double across all transactions, including transactions from customers who had been loyal customers for many months or even years started being declined.  Their decline rate was so high they were no longer profitable.  After identifying the fraudulent traffic and putting advanced fraud detection systems in place on their signup page, the decline rate did not begin to improve until 90 days later. Even nine months later, they still had not returned to the authorization approval rate they had before the fraud problem.  Ultimately, they had to abandon their merchant account and move to a new provider, which significantly improved the problem for them. 

Here at FlexPay, we partner directly with issuers and issuing processors who provide us with billions of transaction records across the entire US economy. We analyze various trends and assist all players in the payments ecosystem to fine-tune and optimize their processing systems.

We, therefore, have a plethora of unique and invaluable information on which MCC’s are the best for merchants and which to avoid.

Contact us to see how we can help you today!


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