DirectPayNet

Category: Merchant Category Code

  • Find, Change, and Optimize Your Merchant Category Code

    Find, Change, and Optimize Your Merchant Category Code

    MCC codes (Merchant Category Codes) are assigned to every merchant upon the approval of their merchant account application. As important as these codes are, they aren’t always readily apparent, leaving merchants in the dark.

    Each MCC code comes with varying rates, fees, benefits, and drawbacks. It’s not always easy selecting the best MCC for your business because any one business can meet the criteria for several codes. But one thing’s for certain, you should never leave it up to your provider to choose on your behalf.

    What You Need to Know About Merchant Category Codes

    Knowing what merchant category codes are can significantly help you determine which one to choose for your business. Or, at the very least, speak with your merchant services provider about helping to select the best one for you.

    What are MCC codes?

    Merchant Category Codes are a four digit-long number that represents your business type. They can be assigned by your merchant services provider or aggregates like Stripe. Otherwise, you can select one yourself.

    Your MCC code is what labels your business as low-risk, high-risk, direct response, garden supply, ticket reseller, etc. There are thousands, each with their pros and cons.

    Who assigns an MCC?

    MCCs are set by the International Organization for Standardization (ISO) and credit card processors are the ones that assign them.

    Even so, each credit card network has its own differing list of merchant category codes in use. Your merchant services provider can help you find the right code to use for each network (Visa, Mastercard, American Express) that your business wants to use with your payment gateway.

    It’s a good idea to create a list of the codes in descending order of value that applies to your business per credit card network.

    What is my MCC code?

    If you already have a merchant account and are working with a payment processor and acquiring bank, you’ve already been assigned an MCC code (depending on the networks). If you don’t know yours and would like to, you can contact your merchant account provider or the payment processor directly and ask.

    The code is sometimes listed on your merchant statement or merchant backend. If not, contact your provider and ask. They will happily send it in an email.

    Can I choose my own Merchant Category Code?

    Yes you can, and each code has its advantages relating to rates and fees.

    You might be thinking, “shouldn’t I choose the MCC code that has the lowest possible rates?” Not always. For one, the code has to match your business type. If you request a code that your business doesn’t quite match up with, then you’ll be denied. And some codes might have higher rates for international transactions but lower rates for domestic, and vice versa. Or the option for charging a convenience fee for credit card purchases.

    The best code is the one that suites what you’re selling and who you’re selling it to.

    What are high-risk MCC codes?

    Some MCC codes are specifically for high-risk businesses. If you run a business in a high-risk industry, then you’ll likely be assigned a high-risk code.

    You can, however, combat this and choose your own in a low-risk category as long as your business relates to it. For example, you might be dropshipping home goods. You can apply for a merchant account with an MCC in the furniture and home goods categories.

    It’s up to the provider to approve your account, meaning there’s no guarantee one will be approved over another.

    Where can I find a list of merchant category codes?

    Visa, Mastercard, and American Express have their codes listed online for merchants to view in their own versions of a merchant handbook. Browsing through, you should be able to find the codes that match up with your business type.

    Keep in mind that there are a lot of codes to sift through and you’ll have to do it with each card network. It’s great to be familiar with the codes that apply to you, but don’t shy away from asking your merchant account provider for assistance to speed up the process.

    When is the best time to select my MCC?

    The best time is when you are submitting your application. There is a box that’s labeled MCC or Business Type where you can insert your preferred code.

    It’s tough but not impossible to change a code that’s already been assigned. Most providers won’t want to change it on your current merchant account and might request that you submit an application to open a new account to replace it.

    If you don’t agree with the code you’ve been assigned and you catch it when your account first opens, then you should request to change it ASAP. It’s easier for the processor to change it when there’s little or no transaction history.

    How Merchant Category Codes Affect Your Business

    MCCs represent the risk of your business, outline the rates and fees you pay, and contain a few other attributes. Choosing the best MCC for your business doesn’t always mean the lowest rates and checking off every possible benefit. Rather, it means you have the best price—not the lowest price—for processing rates and benefits that matter most to your business.

    Interchange Rates

    The interchange rate or discount rate is what a merchant pays every time a card is swiped for payment. Each card network varies on their interchange fees. Another factor that highly affects interchange fees is your business type. If you operate in a high-risk industry, you’ll likely see higher interchange rates. This is why it’s important for you as a merchant to choose the best MCC for your business. Even when you are considered high risk, you can apply a code that might have lower interchange fees (if that’s what’s most important to you).

    Risk Profile

    Speaking of high-risk industries, an MCC code is also used as a shortcut for acquirers to assess your risk type and whether they can provide services to you. Many banks and processors refuse to work with high-risk businesses. On one hand, you get a speedy denial so you can move on to the next provider faster. On the other, you’ve wasted an application on a processor that doesn’t work with your business type. You want to avoid getting too many application denials, so before submitting your application make sure you’re up front about your risk profile.

    Convenience Fees

    Merchants who accept credit card payments are privy to something called a convenience fee. This is a fee charged to the cardholder when using their credit card. It can only be used for credit cards, not debit cards, and it’s only available for some merchant category codes. This fee can be greatly beneficial for business owners who see a lot of small transactions that would get eaten up by fees.

    Credit Card Rewards

    Normally, rewards are associated with customers. But it might be beneficial for you to select an MCC that allows reward calculations. For example, if you are a dropshipper and work closely with a brand that allows customers to receive points. The actual reward program doesn’t benefit you directly, but if you allow customers to gain points from shopping on your online store then you’ll be able to drive more traffic to your site.

    Be Aware of Increased Decline Rates Associated with Your Chosen MCC

    As mentioned, there’s a risk profile associated with all MCC codes. Higher risk codes assign a specific threshold for your business related to transaction amounts (high ticket purchases are more likely to be declined), complaints, chargebacks, and more. Issuers have a watchful eye on businesses operating with certain codes and are quick to hit pause on your ability to accept payments.

    If you’re a high-risk business, talk to your merchant services provider about how you can mitigate this type of activity. You’ll want to apply some type of chargeback protection and fraud prevention to your shop which your provider can help you with.

    Merchant Category Codes Apply to Stripe, Too

    MCCs apply to 3rd-party payment processors, too. Stripe, PayPal, Square, and the others all assign you a code because it’s still a merchant account. The process of obtaining your payment gateway is simpler (though not always for the best), which also means you have less control over choosing how to run your business from a payments perspective.

    Choose Your MCC Code on Stripe

    Yes, you can choose an MCC for your Stripe account. And you should! Specifying the best merchant category code for your business is important, even when using 3rd-party services. One of the downsides is that you’ll have to do the research yourself, as Stripe isn’t so willing to walk you through the thousands of MCCs available.

    Be aware that Stripe uses fixed rates for all of your transactions, meaning there’s no room for negotiation or adjustments. That’s especially true if you’ve already opened your account. If you want to continue to use Stripe (and there are valid reasons for doing so), then make sure you put in the MCC you want. Call them, chat with them online, get in touch with Stripe support, do what you have to do to make sure the code of your choice is being applied to your account.

    Quick to Open, Quick to Be Terminated

    Stripe and most similar services outline verification documents and other verification requirements (like tax ID number for IRS tax purposes, SSN, business information, identity verification and bank account information) in the application process. Within minutes, you’ll get the Stripe API. Their onboarding flow is as straight-forward as possible to get your shop processing payments faster, but be aware that speed doesn’t equate to security. Your business entity and account type according to the MCC code that you choose/are assigned might not meet Stripe’s requirements. This can lead to Stripe freezing funds and terminating your account.

    All merchant service provides require your business name, legal entity (sole proprietorship, LLC, etc.), ID verification, Know Your Customer, and additional information to get a custom account opened. Stripe may be faster than applying through an account provider like DPN, but these express accounts can be harmful to your business’ and your future as the account holder.

    Want to find the MCC codes with lower rates, better benefits, and less hassle?

    Applying for a real merchant account is a long-winded process. Don’t risk making any mistakes by contact the experts here at DirectPayNet.

    We’ll help you apply for an account with the merchant category code(s) that provide the biggest benefits toward your business goals. We’ll also cover chargeback prevention and fraud protection to provide steady payouts to your acquiring bank.

    Our customer service agents are ready to help. We’re available to answer any questions you might have and get your business running with scalability in mind. Contact us today.

  • FAQ Fridays: Your Merchant Category Code Can Increase Your Sales

    FAQ Fridays: Your Merchant Category Code Can Increase Your Sales

    A regular query I get from prospects and new clients, like this one from Paul K., who runs a supplement shop that’s been scaling considerably in the last few months:

    “Maria, I’ve signed up with a new payment processor – and they asked me what Merchant Category Code (MCC) my business is. What’s this all about, is it important?”

    Short answer: Yes! 

    The Merchant Category Code – I’ll refer to it by the acronym MCC for the rest of this explanation – is important for your business.

    You need to make sure you are in the right MCC classification to keep your costs and decline rates down.

    Here’s some more detail:

    Most recently, the question about MCC came from Paul K., a merchant selling supplements on a subscription model – 

    His products included a range of nutraceuticals, a protein powder, and also some e-books on fitness and health topics as upsells.

    Paul never even knew the MCC existed until they switched accounts and the new payment processor asked them about it.

    What he noticed – 20% of his transactions declining on the front-end.

    And Here’s What I Told Paul:

    “Dear Paul,

    The merchant category code that your payment processor assigns to your business has several impacts on your transaction fees and approval rates.

    If you’re a nutraceutical merchant selling supplements on a monthly subscription, you may be categorized differently depending on the processor you work with – 

    • One processor may decide to place you in the MCC 5968 for Direct Response businesses offering a subscription model.
    • Another processor might make the case that you are in MCC 5499 because you sell supplements, protein powders and other food type items. 
    • If you sell a lot of e-books or info products, MCC 5999 (miscellaneous retail) might apply…
    • And for digital media sellers – MCC 5815 could be the best option.

    Important things to note:

    • Your merchant account fees will vary depending on MCC
    • Your approval rate can also vary – that’s because your customers’ bank may have restrictions placed on certain MCCs
    • Credit card rewards, debit cards and prepaid cards all carry a different cost mainly because of the benefits offered to the consumer
    • American Express typically charges the most as they offer a lot of benefits to their members

    If you have more questions and want my input on the best MCC selection for your business – let’s schedule a call to discuss it further.

    Maria Sparagis”

    Of course, I was trying to keep things simple so the email didn’t confuse Paul and his team too much…

    As always with payments, there are several more layers of detail and complexity.

    Let me explain…

    Your Merchant Account Fees, & Discount Rates

    First – a definition:

    Interchange is the fee that the card networks like Visa and Mastercard charge for processing a transaction.  

    Some payment processors charge an interchange plus fee (also called a cost plus fee) for your merchant account.  

    The cost of interchange varies depending on your MCC and the card type your customers are using.  

    For example: 

    For a debit card transaction, selling a supplement subscription using MCC 5968 (direct response merchants) will have a much lower fee than MCC 5499 (supplements, protein powders and other food type items) for that same debit card.

    Interchange fees are ALSO what allow Visa, Mastercard, Discover and American Express to offer high credit card rewards.

    The credit card companies fund the rewards to their customers from the fees a merchant pays for processing that credit card.

    Some payment processors charge a flat fee – for example, payment providers such as PayPal or Stripe have flat fee pricing with an additional fee for foreign or corporate cards. This means interchange fees are not important for merchants on these platforms.

    Other payment processors charge a 3 tiered discount rate – this means they categorize the cards your customers pay with into 3 ‘buckets’, and charge a specific price depending on which ‘bucket’ the customer’s card is in. Again, in this case, interchange fees are less important for your business.

    Overall, selecting interchange-plus/cost-plus pricing is the best option because you will know how much you are paying per card and what the markup is for your processor. 

    Typically, interchange-plus/cost-plus saves you money on your merchant account fees. 

    Most merchants prefer the lower fees for interchange-plus/cost-plus, but some merchants need the certainty of a flat fee so they can easily reconcile and forecast merchant account fees at the end of the month – and they are prepared to pay what are usually higher fees for a ‘sure thing’.

    (The choice is similar to a variable rate vs a fixed rate mortgage loan. Variable almost always comes back as the lower cost option – but some people prefer the certainty of a fixed rate so they can make a repayment plan without worrying about interest rates)

    So Why Not Just Choose The MCC With The Lowest Interchange Fees? 

    It’s not that simple. 

    Your merchant services provider cannot just assign you any merchant category code you choose…

    They have their own compliance procedures, and your MCC needs to make logical sense depending on the type of product or service you’re selling. 

    That being said – your business may fit into several MCCs.

    At first glance, the obvious choice seems to be – choose the Merchant Category Code(MCC) with the lowest interchange cost!

    Not so fast…

    If you’re in a high-risk industry, you may be better served by a MCC that is not considered high-risk – even if the fees are higher. 

    Some Direct Marketing merchants accept higher interchange rates to get a MCC that is lower-risk to try and get better approval rates.

    There’s also the credit card companies procedures – Visa and Mastercard come up with different operating rules for specific MCCs – and your payment processor must comply with them.

    The many and varied rules and policies between credit card companies and different payment processors can impact your business in unexpected ways…

    And if your business model changes, you may need to change your MCC, and also change the way you charge your customers.

    For example, Visa added new rules to MCC 5968 for free trial or discounted subscription merchants in April 2020 (implementation delayed due to COVID-19).  

    These new rules govern merchants’ abilities to charge a subscription fee without the customer’s explicit consent [LINK – Details Here]

    Working with a specialist payment processing consultant can save your company a lot of time, money and headaches.

    Contact the DirectPayNet team to review the merchant fees you’re paying – and find out if you can get a more cost-effective credit card processing system for your e-commerce business.

    We specialize in helping high-risk businesses overcome the obstacles of higher than required merchant fees.

    Your Transaction Approval Ratios May Be Higher With A Different MCC

    Some issuing banks have limitations or “scrubbing” set up for merchants of a particular MCC. 

    The reason for this is because some merchant category codes generate more chargebacks and fraud than others.

    So for example, your customers’ bank may have a limit on the amount a transaction can be if it comes from a MCC 5968 merchant.

    So there are some ‘tricks of the trade’ to help reduce these problems:

    Testing different price points with the different merchant accounts is very important to understand how you can maximize your conversions. Many direct marketing merchants increase checkout conversion rates substantially by lowering their AOV to under $100.

    Another option is to operate 2 payment gateways, with each account registered under a different MCC – so you can capture any declines that come back as an issuing bank decline, and then try run them through the second gateway with a different MCC.

    Many issuer bank declines are masked MCC code declines, simply because the customer’s bank doesn’t want to take the risk.

    For example, an MCC 5967 purchase means the customer is buying adult entertainment. That doesn’t fit the risk profile for many financial institutions.

    Some payment gateways and SaaS companies offer merchants an option to ‘cascade’ front-end transactions to different merchant accounts to try to capture the sale. 

    This ‘cascade’ feature checks multiple merchant accounts in real time to see which one will process the transaction – and is totally invisible to the buyer/customer – adding significant sales dollars to your front-end funnel.

    Couple that feature with multiple merchant accounts in different MCCs and you can significantly reduce decline rates.

    One word of warning though – select a PCI compliant payment gateway or software to reduce the risk of data breaches when passing customer data from one merchant account to another.

    Contact DirectPayNet to learn about payment gateway options that offer conversion boosting features for your funnel and subscriptions.

    Your MCC Can Affect Your Chargeback Ratio

    Your customer’s credit card statement will tell your customer what kind of purchase was made by providing a brief description, such as ‘SUBSCRIPTION PRODUCT’.  

    American Express makes it very obvious on the statement – 

    If a customer sees ‘SUBSCRIPTION PRODUCT’ and is running low on funds, they may choose to cancel or even send you a chargeback. 

    VISA and Mastercard also have different rules for how a customer can chargeback a transaction –

    Some merchant category codes allow issuing banks to chargeback a transaction more easily than others – a grocery store purchase will be a lot harder to chargeback than a nutraceutical product on a monthly subscription.

    Credit card companies’ rules are there to protect customers against what they decide are “shadier” businesses or products. 

    Drug stores, government services and other mainstream retailers like clothing stores typically benefit from lower interchange fees as well as lower potential chargeback ratios due to their MCC.

    Paying attention to the MCC you’re assigned when you start working with a new merchant services provider is very important – it can impact your merchant fees as well as your transaction approval rate. 

    To understand more about merchant category codes and how they impact your conversions, talk to the experts at DirectPayNet. 

    We can guide you in selecting a MCC, and walk you through ways to improve your conversion ratio and lower your merchant fees.  Contact DirectPayNet today.