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MCC Madness: Why Your Merchant Category Code Matters
Do you know what your MCC is? An MCC, or Merchant Category Code, is a four-digit number that identifies the type of product or service your business sells. These categories are designed to separate ice cream shops from dry cleaners and pet stores from doctors when it comes to payment processing. When you first begin processing credit cards, the processor you’re working with will assign you your MCC after you’ve explained to them what kind of business you are and what you sell. Seems pretty simple, right? Not so fast. Some unscrupulous processors will misclassify your business on purpose for their own financial gain.
Why Do MCCs Matter?
To understand why it’s a big deal for a credit card processor to knowingly misclassify a business, we have to know what MCCs do in the first place. Your MCC dictates the interchange rate your business will be charged to accept credit cards – the published rate that all businesses in your industry incur, no matter who is handling their processing. Processors make money by adding fees on top of this interchange rate – this is a little bit of an oversimplification but gets at the basic point. Interchange rates are set by the credit card brands based on a variety of factors that mostly boil down to risk. Do you operate a pawn shop or a casino? Your interchange rate will be higher than a grocery store because the card brands have data that shows that pawn shops and casinos are riskier to underwrite – sorry to be the bearer of bad news. If several MCCs would apply to your business – for instance, if you operate the world’s first casino inside of a grocery store – your processor will take into account things like which part of your business accounts for more credit card sales in assigning your MCC. You cannot choose your MCC – your processor has very specific rules they must follow to assign it.
Breaking the Rules
Of course every business wants to pay the absolute lowest interchange rates possible – all casinos would classify themselves as grocery stores if they could. There’s an incentive for processors to fudge these codes as well, however. Let’s illustrate why with an example. A local independent auto repair shop should be classified under MCC 7538 for Automotive Service Shops (Non-Dealer). The full MCC definition is three paragraphs long and is accompanied by some other business types that also fall under it – muffler shops, oil and lube stations, and auto glass shops, just to name a few. On the other hand, we have your local corner gas station. They would be classified under MCC 5541 for Service Stations. The definition for this code states that these businesses can also offer auto repair services, a car wash, a convenience store, or any number of additional services, but they must sell retail gasoline.
The Service Station MCC qualifies for lower interchange rates than the Automotive Service Shops MCC. We have sometimes seen shady merchant processors mark down an automotive repair shop as a Service Station even though there’s not a gas pump to be found on the property. This means that the auto shop pays less than they should in processing and gives the processor two options: they can either charge the shop the higher rate and pocket the difference or keep the rate illegally low and know they have a customer for life – no other processor will ever be able to beat it since the new processor will have to be honest and use the correct MCC.
What This Means for You
You might be asking yourself why you should care that unscrupulous processors are misclassifying businesses on the wrong MCCs. That’s the processor’s problem, right? While it most certainly is a huge problem for the processor if they get caught, it’s also an issue for you, the business owner. If you have been misclassified on an MCC that allowed you to pay an artificially low interchange rate, you may be liable for paying back interchange fees to correct the discrepancy. Depending on how long you have been paying the incorrect rate and how far off the mark it was, this can add up to quite a lot of money.
To protect yourself, visit this website to see how your business is currently classified. You can double check the definition of each MCC here – if something seems off, get in touch with your processor right away. It may be an honest mistake, but you’ll still want to get it taken care of immediately. If you can’t get a straight answer from your processor, don’t hesitate to reach out to us at 360 Payments. Give us a call at 1-855-360-0360 or drop us a line on our website. We’d be happy to show you why we’re a different kind of payments company.
PS – Don’t get rid of all credit card signatures just yet. Here’s why not.
PPS – You should never ever sign a credit card processing contract. Period.