Merchant Category Codes The Impact on Your Business

When processing card transactions, credit card companies assign a four digit Merchant Category Code (MCC) to a business when the business first starts accepting Visa or MasterCard payments. The merchant category code acts as a classification code for the type of goods or services a business provides.

This code can impact on whether or not card payments can be accepted in certain regions. For example, 7995 is the online gambling code and gaming sites are blocked across the U.S. by all issuers because online gaming is illegal; apart from in the states of Delaware, Nevada and New Jersey.

Why Are Merchant Category Codes Important To Your Business?

Merchant category codes can have an effect on whether credit card payments are accepted by Issuing Bank, conversion rates, and also merchant processing fees.

Merchant processing fees are made up of three things:

– Card scheme fees
– Interchange
– The acquirer fees

MCC codes can be used in some circumstances to determine interchange, such as Airlines and Petrol, but generally do not play a main role in this. (Interchange is the fee that is passed on to the Issuing Banks in recognition of their costs in operating card). So interchange is one component of the “merchant fee”.

With interchange, unless the merchant is in a specific industry interchange fees are fixed and are based on a number of factors including the location of the merchant, the country of the Issuing Bank, the type of card used (credit, debit, corporate, loyalty etc.) the Card Scheme and how the transaction is captured (face to face, MOTO or ecommerce).

The acquirer fee is influenced by the size of the merchant, the number of transactions processed, the merchant’s business model (merchant risk), and the strategic importance of the merchant.

How Does The Issuing Bank Impact On These Codes?

Each Issuing bank is ultimately free to decide which transactions it feels comfortable in accepting on behalf of its cardholders. This is determined by the cardholders’ profile, credit history, and credit limit. Issuing Banks can also decide whether or not to accept transactions based on cardholder location, spending behaviour and the MCC of the merchant.

As a result, the Issuing Bank that you are using can have a significant impact on the business you transact. The merchant and the acquirer have no control over which Issuing Bank authorises a transaction. The Issuing Bank relationship is between them and the consumer.

Decline ratios can vary between 5-14%, which can have a significant impact on resource and revenue figures. This is typically a reflection of the risk profile of different businesses, and also a reflection of the consumer portfolios that are offered certain card types. Businesses that sell internationally tend to find that cross border transactions see a higher decline rate.

Decline Reason Codes

The most common reason for card decline is “insufficient funds” whereas an incorrect credit card number or expiration date will not go for authorisation but it will fail/reject rather than decline, in which case the consumer will be asked to type the correct card number. So incorrect card numbers are not really authorisation declines, as the authorisation request hasn’t really taken place.

What is the difference between ‘hard’ and ‘soft’ bounces?

Hard declines are issues that typically do not change i.e. Code 2004 (card expired); Code 2005 (invalid credit card number); Code 2006 (invalid expiry date).

Soft declines are issues that may change if retrying at a later date i.e. Code 2000 (Do not honour, the customers bank is unwilling to accept the transaction); Code 2001 (Insufficient funds); Code 2002 (limit exceeded).

How To Increase Payment Conversion Rates?

Within financial services there are numerous MCC codes and the balance is always to ensure that the acquirer selects the right MCC to ensure they comply with the scheme rules, whilst looking to get the merchant converting as effectively as possible.

If you want to increase conversions, the best advice is to look at your auth/decline ratios and if high – contact the PSP/Acquirer to see if anything can be done to reduce the level of auth declines. This combined with the fraud rules that your payment gateway uses can enable you to reduce card declines without increasing your fraud risk.

If you don’t have any fraud screen tools then using fraud rules for the first time will effectively increase declines to protect the merchant from potential cardholder fraud. Once fraud rules are in place they can be effectively tweaked to find the right balance between card acceptance and acceptable fraud loss.

Can You Get Your Merchant Category Codes Reclassified?

If you believe your business has been misclassified you should go back to your acquiring bank, and ask for it to be reviewed. You may find that MasterCard and Visa use different merchant category codes for your business as their criteria can differ; so first identify whether you have a problem with both card companies, or just one.

Furthermore, it is worth trying to understand why you may have been allocated a particular code in the first place. For example, if your business does more than one thing (perhaps it sells services as well as products) the code should reflect the greater percentage of your business.

Certain sectors are grey areas. In our previous post Merchant Category Coding: Friend Or Foe? we looked at code 7273 that represents the dating industry and escort services. Many dating agencies would argue that their business is distinctly different from the escort industry.

Similarly, the hotel sector can be a broad industry incorporating high-risk ventures such as timeshares. In this case a hotel chain with timeshares may be classified as ‘Real Estate Agents and Managers – Rentals’, as they rent both properties as well as rooms.

With a better understanding of why you may have been misclassified you will be able to make a good case for having your MCC reviewed.

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Merchant Category Coding: Friend Or Foe?