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Merchant Category Code(MCC) & Miscoding

What is Merchant Category Code

A merchant category code is a four-digit code that identifies the merchant’s category. Banks and payment card networks provide this four-digit code to retailers based on their specific categories and types of business. Each business is assigned an MCC code by the payment network.

The MCC code has a number of implications for your business, the first of which is the cost of transactions and the risk profile of your account. The risk profile indicates how likely it is for merchants in your category to get consumer complaints, chargebacks, and refunds.

The following are some examples of how merchant category codes are commonly used.

  • If a consumer has a credit card that gives 5% back on airline purchases, the offer should be applied to any purchase that falls under MCC 4511, which includes airlines and air carriers.
  • Companies and government bodies must report service purchases to the IRS so that the IRS may ensure that those services pay all required income taxes. If a business uses a credit card to make a purchase, MCCs can help them determine whether the transaction is considered a service.
  • A petrol station classified under the MCC may pay a different interchange fee to its credit card processor than a vehicle rental firm listed under the MCC.

Every industry has its own set of transaction patterns and levels of risk (potential for fraud). MCC codes are used by issuing banks to determine whether or not to accept a transaction. 

In  brief, a merchant category code identifies the primary business category in which a merchant operates and can be used to:

  • High-risk businesses are charged greater processing fees than low-risk enterprises to determine the interchange cost they will pay.
  • Cashback and reward points for certain merchant categories must be updated by credit card companies.
  • It is used by card networks to determine credit card transaction rules and restrictions.

MCC codes may also have an impact on the merchant’s processing rates. A business may end up paying more processing fees than necessary as a result of an inaccurate classification.

In order to track and regulate transactions, payment providers employ merchant category codes to identify merchants and enterprises based on the sort of goods or services they supply.MCCs can be used for tax reporting, interchange marketing, and data collection on cardholder purchase trends, among other things. 

What is MCC Miscoding?

Despite the fact that the code has been established, merchants continue to operate legally by routing transactions of various types through the MID. Miscoding refers to the process of routing transactions. The gaming MID, for example, is where merchants in the games sector send their gaming traffic.

VISA discovered that some merchants were offering their products and services in countries where local laws ban such transactions or where the appropriate financial services body has severe licensing requirements.

When a bank assigns a different category code to a merchant in order to obtain lower interchange rates or a higher approval percentage for that business, this is known as merchant category code miscoding. Miscoding occurs most frequently when a merchant account is established with an acquiring bank and a payment gateway. When a merchant has a large volume of transactions or is ready to pay higher costs for miscoding, this is done.

The Risks of Being Miscoded

Despite the fact that miscoding is uncommon, a merchant may be coded as a low-risk merchant even if it falls into the high-risk category. This miscoding is frequently done by accident by the acquiring bank. Merchants, on the other hand, should never try to trick banks into miscoding their transactions in order to obtain lower exchange rates. Even though a merchant is engaging in high-risk transactions, if the bank considers it a low-risk merchant, it may be subject to less monitoring owing to miscoding. These merchants are referred to as “transaction launderers”.

If such a type of coding error is uncovered during an audit, penalties of $1,000 to $10,000 per transaction may be applied. While a payment processor is more likely to face severe penalties. If one suspects that their MCCs have been miscoded, they should contact their payment processor right once and request a documented rectification.

The best way to correct MCC errors

If you’re a merchant who’s been miscoded, or even if you’re unknowingly implicated in transaction laundering, you and your company might be in big trouble. Contacting your merchant account representative is the key to resolving this problem

Your merchant account representative can assist you in correcting the coding error and assigning you the appropriate merchant category code for your company. 

Conclusion

Any business’s smooth operation depends on having the correct MCC code. In most countries, activities such as MCC miscoding to obtain lower interchange rates or a better approval percentage are prohibited and can land your company in serious trouble. As a result, if you own a business in any nation, you should avoid engaging in such activities and obtain the appropriate MCC code to conduct your business in accordance with local commercial legislation. The Visa Merchant Data Standards Manual is a great resource for learning about categories of merchants and their policies and procedures.

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