Merchant Category Code Explained: What it is and Why it Matters

Merchant category codes, or MCCs, are unique codes tied to vendors which define the type of item being transacted on. These codes are defined by credit card payment issuers. The goal of a merchant category code is to define the merchant and the type of goods or services being sold to prevent certain transactions and track others. You may have benefited from MCCs in the past, for example gaining a reward cash back on your credit card for certain purchase types, with a variety of uses there is plenty to understand about MCCs.

Understanding Merchant Category Codes (MCC)

How Are Merchant Category Codes Determined?

The credit card company will assign the merchant category code either by the name of the business or the nature of the seller's business. These are standard codes utilized by all credit card payment companies.

What Are Merchant Category Codes Used for?

There are many uses for the merchant category code. For the credit card processing company this may be to assign reward points to credit card holders, change the rate of the transaction fee charged to the seller, or restrict certain authorizations for goods not supported by the credit card company.

For the business your merchant category code will be linked to the riskiness of your business, for example selling puzzles would be a less risky transaction than selling heavy industrial equipment in the eyes of the credit card company.

Why Do Merchant Category Codes Matter?

Merchant Category Codes are important for a variety of reasons including measuring the fees a merchant should pay when accepting a credit card transaction, they help the Internal Revenue Service (IRS) categorize businesses, and contribute to the risk profile of merchants.

Examples of Common Merchant Category Codes

Merchant category codes are four digit codes created by the International Organization for Standardization, or ISO. These standard codes are broad enough to fit most business categories. An example of a merchant code might be 1520 representing general contractors for both residential and commercial, and 5013 representing motor vehicle parts transactions.

How to Find a Business’s Merchant Category Code

To find a merchant category code you will first need to turn to a source of MCCs such as Citi. Here you will see the wide variety of merchant category codes offered to different merchant types based on the goods they sell. You can manually find your code on a list like this.

Another option is to lookup your Merchant Category code based on the merchants name with tools such as Award Wallet. Simply type in the name of the business you are interested in finding the code for, or even looking up your own.  

Why Would You Want to Know a Company’s Merchant Category Code?

There are a few reasons why you may want to look up the exact code for a business, depending on whether you’re the business, the consumer, or the credit card company the importance of these codes vary.

Why Are Merchant Category Codes Important to Business Owners?

For owners, you want to make sure that credit card companies are seeing your business as a legitimate and properly categorized merchant. The code will provide insight as to the rates you can expect to pay on credit card transactions, and the level of risk associated with your merchant type.

Knowing the level of risk may also provide insight as to whether you could expect banks to decline charges based on how risky they deem your business or merchant type, which may trigger more follow up to be recategorized, or proactively prefer other payment types.

How Can Merchant Category Codes Boost Credit Card Rewards?

Oftentimes you may see credit card commercials or advertisements promoting 3%, 4% or even 5% back on certain purchases such as travel or grocery. In the background of these promotions, the merchant category code is the mechanism being utilized to measure the amount of spend and applying these rewards.

As a seller you may want to make sure your MCC is mapped properly as customers may expect certain cash back on purchases. As a buyer you can always look up an MCC with your credit card company's list of MCCs to ensure the points you’re expecting to redeem are going to be properly mapped.

Issues with Merchant Category Codes

Merchant category codes are not always as straightforward as one to one. For example, United Airlines' merchant category code is 3000, but United Airlines sells more than just airline tickets; you can also purchase checked bags, food and drinks, and insurance through the business. Having many SKUs is only one way merchant category codes become muddy.

How Does Having A High-Risk Merchant Category Code Affect A Business?

Having a high risk merchant category may be associated with businesses who experience a high level of charge backs, or sell items which are more risky in the eyes of the law such as firearms or potentially federally illegal to transact on such as cannabis.

Having these attributes may limit the credit card companies who allow purchases at your business, may cause higher fees associated with the transaction than other businesses, or may all out prevent purchases using the credit card company card at your store.

Why Doesn’t The Merchant Category Code Match What Type Of Store It Is? 

Merchant category codes are assigned to merchants when they begin accepting payments from that credit card company's card. It is possible based on the name of your business that you are miscategorized.

For example, if you are running a business called “The Diner”, which sells vintage collectibles, it is possible your merchant category code is tagged to a restaurant when the transactions begin flowing in. It is always important to check your MCC as an owner for this reason.

Can Issues With Merchant Category Codes Cause Declined Transactions?

The short answer is yes.  If a customer is trying to purchase something from you utilizing their credit card, and the credit card company has deemed that purchases from the merchant category code are not accepted based on their customer agreement and policy, these charges may decline and the customer will need to utilize a different payment method.

Do Merchant Category Codes Affect Chargebacks?

The impact of merchant category codes do affect the fees associated with chargebacks. Businesses with higher risk MCCs may see higher chargeback fees from credit card payment company’s as a result of the line of business they are in.

This is where a business owner will need to weigh the frequency of chargebacks, and the volume of transactions from credit card companies to come up with a risk reward; the benefit of accepting these payment types from customers versus the risk of higher fees associated when things don't work out well on these transaction types.

Final Word

While merchant category codes are automatically assigned, in the background of day to day processes, and may not seem like they will impact your business greatly, they remain important to understand as an owner and consumer. The impact of risk, fees, and rewards contribute to the ecosystem of credit card transaction benefits and acceptance. Ensuring your business is properly categorized is key to serving customers well and ensuring they redeem the benefits they expect to gain on purchases from your business.