There’s an awful lot of data that’s thrown at merchants and consumers where credit cards are concerned. However, from a consumer perspective, knowing how your credit card categorizes businesses is a useful tool to maximize the benefits you gain from your card’s rewards program. For merchants, knowing how your business is classified will help you make sure you’re getting the best rates for interchange fees. I’ll be going over why you should know the different, “merchant categorization codes” so you can take maximum advantage of your card and get the best benefits from them.
History of Merchant Categorization Codes
Back in ’04, the IRS required that businesses be classified based upon the market segment that they occupy. An MCC is a four-digit code that a business is assigned once it starts accepting one of the two major credit card brands; Visa or MasterCard. Businesses that purchase some kind of service are required to report it on a 1099 form at the end of the year, while purchased goods don’t have the same requirements. Certain businesses are also tagged for lower interchange fees depending on the type of business that it is. You can find a database of MCCs here.
How MCC Affects Consumers
While a consumer doesn’t have to worry about interchange fees for their business, MCC still affects consumers by the codes assigned to the stores that they frequent and how that comes into effect with their rewards programs for their credit cards. Say your Visa card gives you 5% cash back on groceries when you use it, you’re going to want to know what stores qualify as a grocery store according to Visa. For example, Target, qualifies as a grocery store, so knowing this, even if you purchase things that aren’t considered grocery items, because Target is a “grocery store” according to Visa, you will still receive the 5% cash back for your entire purchase.
Conversely, however, you should keep an eye out to make sure that a business that you think is in one category, is in fact, in another. For example, you may think that 7-11 might qualify as groceries, but in fact it actually falls into “service stations” category. A great resource to use to find out what businesses fall under what MCC is to use Visa’s Supplier Locator website.
How MCC Affects Merchants
While how MCC affects consumers is relatively simple, for merchants, it gets a little more complicated. MCC can affect a merchant’s interchange rate, now we’ve spoken about interchange briefly when we discussed tiered pricing v. cost plus pricing. However, there are a few factors, some of which are outside the business owner’s control. For example, the type of card, how your payment processing account is configured, as well as what steps you take to complete each transaction can all affect your interchange rate. For the sake of brevity, we’ll just focus on how your interchange rate is affected by how your business is categorized.
Certain industries qualify for special incentive programs that mean better rates. For instance, card associations may feel that these specific industries have a markedly higher growth potential and want to encourage card use. Or, the special rate could be an incentive offered by Visa or MasterCard to promote card acceptance. Some examples of these industries include: charities, supermarkets, insurance providers, and gas/service stations. However, some businesses that do qualify for a better interchange rate don’t receive it because their accounts haven’t been properly categorized by their payment processor’s systems. To make sure you’re getting the best rate, talk to your payment processor and make sure they understand: what industry your business operates in, that your industry classification is correct, and whether or not your categorization qualifies you for a special interchange rate. These programs can lower your rates by 10 to 30 basis points lower than standard retail rates, saving merchants between $1.00 to $3.00 on every $1,000 processed.