A merchant category code is a four-digit number assigned to a merchant by credit card companies once it starts to accept payments. This code is important for taxes and recordkeeping as well as for chargeback management. This code is to identify the category into which the merchant falls, based on the kind of products or services which are offered and the risk that is associated to it.
MCC codes were originally introduced 12 years ago as a way of simplifying the 1099 reporting process. It now serves several important functions in ecommerce:
- Quick and easy reporting to the IRS (Internal Revenue Services)
- Determining the interchange fee based on the risk factor (MDR)
- Helping merchants manage risk
MCCs for Tax Purposes
The IRS does not tax the qualifying products a merchant purchases, only services. For example, if a business owner purchases a new printer, that does not need to be reported. However, if the merchant contracts a repairman to fix that printer, the service does need to be reported.
MCCs were introduced in order to simplify the process of 1099 reporting. Noting the MCCs of businesses where purchases are made can help simplify taxes. The Merchant Category Codes help to figure out which business purchases are exempt or not.
Example of High Risk Merchants
MCC 4722 – Travel Services
MCC 5912 – Drug stores and Pharmacies
MCC 7995 – Online Gambling
MCC 5964 – Direct Marketing (Telephone Purchases)
MCC 7273 – Dating and Escort Services
MCCs and High-Risk Processing
Acquirers use merchant category codes preemptively to determine the risk associated to the business. Merchants with particular MCCs are considered to be a liability because the products or services they offer are commonly associated with high chargeback rates and fraud. Businesses with high-risk MCCs often experience restrictions that inhibit their profitability and operations. They are forced to work with high/ medium-risk payment processors, which charge higher processing fees. They are also subject to merchant account reserves due to their nature of high chargebacks. Higher interchange fees are applied and monthly sales amounts can be capped.
MCCs also impact Chargeback management. Riskier MCCs yield higher fees for individual chargebacks. High-risk merchants who breach chargeback monitoring program thresholds are fee eligible quicker than other merchants.
In the long run, MCC codes can seriously affect the business’s profitability and operations.
Maximising Profitability Despite a High Risk MCC
Running a business with a high-risk MCC is challenging, but not impossible with the right knowledge. One of the most important tasks is chargeback prevention to minimize the number of chargebacks and the right team to handle them. Choosing the right acquirer is another vital role of operations as both need to work hand in hand to insure the long run sustainability of the business. If you are interested in a high risk merchant account, don’t hesitate to contact us and our team will be more than happy to guide you through the process.