What are Merchant Category Codes?

Merchant Category Codes (MCCs) are four-digit identifiers that classify businesses based on their products or services. Introduced by the IRS in 2004 and issued by the International Organization for Standardization (ISO), these codes serve as a universal system for identifying merchant types across the payments ecosystem. MCCs influence many processes, such as tax reporting, chargeback liability, interchange rates, and consumer rewards.

How Do Merchant Category Codes Work?

MCCs are assigned when a merchant establishes their payment processing relationship. At this point, card networks evaluate the business’s primary activities and assign appropriate codes. However, this process is not always straightforward – a merchant might receive one code from Visa and a different one from Mastercard, while businesses with diverse operations may receive multiple MCCs. A department store, for instance, might have separate codes for its retail operations and automotive services.

MCCs influence many aspects of payment processing and merchant operations. They determine interchange fee rates, control eligibility for consumer reward programs, and guide tax reporting requirements. Most significantly, they play a vital role in risk assessment, affecting processing fees and operational restrictions. Some MCCs are designated as “high-risk” due to elevated fraud or dispute rates, leading to higher fees, stricter monitoring, and sometimes the requirement to maintain reserve accounts for dispute settlement. The primary uses for merchant category codes include:

• Tax Reporting: The IRS mandated MCCs in 2004 to streamline tax reporting processes, particularly for 1099 forms. MCCs help businesses identify which transactions need to be reported, eliminating the need to review individual receipts. They create clear distinctions between taxable goods and non-taxable services, reducing administrative burdens during tax season and helping ensure compliance with reporting requirements.
• Payment Processing: MCCs shape how transactions are handled within the payment ecosystem. They determine interchange fees, influence processing rates, and can restrict which payment types a merchant can accept. The codes also affect relationships with payment processors, with some processors declining to work with certain MCCs altogether.
• Risk Assessment: Card networks and financial institutions use MCCs to evaluate merchant risk levels and implement appropriate controls. High-risk categories often face stricter monitoring, may need to maintain reserve accounts, and typically pay higher processing fees. This classification influences everything from transaction monitoring thresholds to the types of financial services available to the merchant.
• Consumer Rewards Programs: Card issuers rely on MCCs when administering reward programs, using them to determine which purchases qualify for cash back, points, or miles. The same purchase might earn different rewards based solely on the merchant’s MCC, not the actual items bought. This system also enables corporate card programs to restrict purchases to specific merchant categories.

Chargeback Management: MCCs impact how chargebacks are handled, determining which reason codes can be used against merchants and what evidence is required to fight disputes. Some merchant categories receive special protections against certain chargeback types, while others face additional scrutiny. The codes also influence chargeback fee structures and response requirements.

What Challenges Can Merchant Category Codes Present?

MCCs can create significant operational challenges for merchants, particularly those with growing businesses entering increasingly complex payment ecosystems. Many merchants find themselves constrained by codes assigned years ago that no longer accurately reflect their current business model. Changing an MCC is a complex process that card networks are often reluctant to facilitate, leaving merchants stuck with classifications that might negatively impact their operations.

High-risk MCCs face particularly steep challenges. These merchant types typically encounter higher processing fees, stricter monitoring requirements, and may need to maintain substantial reserve accounts to cover potential chargebacks. Some payment processors and banks may refuse to work with certain MCCs entirely, limiting merchants’ options for payment processing partnerships and potentially forcing them to work with processors charging premium rates.

For businesses with multiple MCCs, these challenges multiply. Different parts of the business might face different processing fees, dispute requirements, and operational restrictions. This complexity can make it difficult to maintain consistent practices across the organization and often requires sophisticated management systems to handle varying requirements effectively.

The rigidity of MCCs can also impact a merchant’s ability to innovate or expand their business model. A merchant might hesitate to add new product lines or services if doing so could trigger a high-risk classification. Similarly, businesses might find their growth constrained by processing limits or reserve requirements tied to their current MCC, even if their actual risk profile doesn’t warrant such restrictions.

How do MCCs affect chargebacks?

MCCs are key determiners of chargeback risk and liability. They dictate which reason codes can be used against a merchant, what evidence is required for disputes, and whether protections apply. Some merchant categories receive special considerations against specific reason codes, while others face additional scrutiny and requirements.

Merchants with high-risk reason codes typically face more frequent disputes and higher chargeback fees, while also dealing with stricter evidence requirements and shorter response windows – all of which contribute to significantly lower win rates. High-risk reason codes can also bias issuers to err considerably on the side of the cardholder.

Businesses operating with multiple MCCs also face additional chargeback related issues. This is because different MCCs face varying evidence requirements for chargebacks, forcing these merchants to adopt multiple dispute management strategies simultaneously. In these cases, win rates frequently suffer as in-house teams struggle to maintain consistent responses to shifting evidence requirements.

How Merchants Can Fight MCC-Related Chargebacks

Rising chargebacks are not just a problem for high-risk or multiple-MCC merchants, but one faced by nearly all merchant types. Friendly fraud levels are accelerating rapidly year-on-year, costing merchants over $100 billion annually, and despite most chargebacks stemming from first-party fraud – or in other words, being illegitimate – issuers still tend to find in favor of merchants only 30% of the time.

Of course, for high-risk and multiple-MCC merchants, or any businesses facing significant numbers of chargebacks, this problem is amplified, and can frequently result in 25% lost net income per year.

The only solution to this problem is accuracy, scalability, and consistency, and detail in your chargeback representations, boosting your win rates and eliminating the huge cost of fees, fines, lost products and delivery charges associated with chargeback loss. But this is easier said than done. Neither in-house teams nor the template-driven approaches offered by most solutions can scale effectively, losing more disputes as cases rise – just when you can least afford it. Merchants need solutions that can scale effectively, while maintaining consistently high win rates across different transaction types and dispute scenarios.

How Justt’s Solution Addresses MCC Complexity

Justt’s AI-powered platform is specifically designed to handle the complexities of modern chargeback management across all merchant categories, at scale, and with no merchant intervention. The system’s algorithms incorporate MCC-specific rules and requirements into their analysis, ensuring that evidence collection and response strategies align perfectly with each merchant’s classification and needs.

Rather than using static templates, Justt’s AI-driven Dynamic Arguments feature adapts to the specific nuances of even the most complex disputes. The platform draws from +500 data points, including acquirer data, third-party sources, and merchant records, to build comprehensive cases that meet and exceed the varying evidence requirements across different MCCs.

Through continuous machine learning, the system constantly refines its approach based on dispute outcomes. It learns from each case, adapting its strategies based on historical win rates for similar merchants and automatically updating its approaches as card network rules evolve. This ensures consistently success rates regardless of a merchant’s MCC classification or dispute volume – in fact, win rates typically double within weeks, and consistently improve thereafter.

Want to see how Justt works in practice? Request a product demo today.