Accepting credit and debit cards as a payment option can be a highly profitable choice for most merchants, as it offers customers the convenience of one of the most commonly and easily used forms of payment, thereby making it simpler for them to patronize the merchant’s business and potentially spend more than they otherwise might. However, as any merchant who has applied for a payment card processing account is aware, not all merchant accounts are the same. When a business first applies to a processing institution for an account, it is assigned a merchant category code (MCC) based on the primary kind of business it offers. This four-digit code was originally implemented in 2004 as a means of simplifying tax reporting, but has since expanded to have a number of other applications.
Merchant category codes allow payment card processors to describe succinctly the type of market segment a given business occupies based on the primary form of goods or services it offers. A restaurant, a gas station, and a computer software store will each have a different MCC number that indicates the sort of merchant it is. The original purpose for these codes was to make 1099 reporting simpler for commercial customers, who needed to report payments made for the purchase of services, but not for goods, on their tax forms. Rather than having to review each individual transaction, they could simply refer to the merchant’s MCC number to indicate whether the business was listed as a seller of goods or a service provider.
Since then, merchant category codes have been put to other uses, some of which have more immediate relevance for the merchant itself. Credit card processing companies charge an interchange fee for each transaction they process. The interchange fee is separate from the markup these companies apply for their own profit, and reflects the expected risk of chargebacks and refunds for transactions of a given type. Interchange fees vary based on a combination of factors, including the type of payment card being used, whether the transaction is keyed, swiped, or online, and what kind of business is receiving the payment. This is where your merchant category code comes into play. Certain types of businesses carry a lower risk for payment processors, and thus have lower interchange fees for the merchant. By ensuring that your merchant category code is accurate, you may discover that you qualify for a different interchange rate, which could be lower than the typical rates.
Another usage of merchant category codes is most relevant to your customers, but a savvy merchant may be able to exploit it to make their business a more appealing place to spend money. Many credit cards offer rewards, such as cash back or airline miles, to cardholders who use their card for transactions at certain types of businesses. Some will offer double or triple points when the card is used to buy groceries, gas, prescriptions, or similar everyday needs. Whether these bonuses apply is determined by the MCC number of the terminal where the transaction takes place. Which code a given merchant has been assigned isn’t always obvious – often, different store locations within the same franchise will have different merchant category codes. For instance, one Target store might be categorized as a grocery store, but the Target in the next town may have the MCC of a discount store. Some stores have separate MCC numbers for their pharmacy terminals. Ensuring that your MCC number is accurate and reflects a business type that offers maximal rewards to your customers can make your business a more attractive place to shop.
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