A Merchant Category Code (MCC) is a four-digit number used by credit card companies to classify the services or products offered by a business. The International Organization for Standardization (ISO) establishes and assigns these merchant category codes. Despite consisting of only four digits, these codes hold significant importance for both consumers and business owners.
The Importance of MCC:
Merchant Category Codes (MCCs) hold significance for both businesses and consumers, mainly due to their influence on Merchant Discount Rates (MDR).
For Businesses:
MDR Percentage: MDR constitutes a fee charged by payment gateway providers to merchants for accepting credit or debit card payments. MDR percentages are determined based on the MCC of a business. Depending on the MCC, MDR can differ for various categories. For instance, payment gateways typically apply an approximate 1% MDR for businesses categorized as educational services and around 1.3% MDR for those categorized as grocery shops.
Business Risk Assessment: Merchant acquirers and payment processors usually evaluate a business's relative risk based on their business type, directly linked to the MCC. This evaluation aids in determining various aspects such as MDR fees (higher-risk businesses entail higher MDR), payment approval rates (credit card issuers might decline payments to high-risk businesses like gambling), chargeback protection (higher-risk businesses might receive reduced chargeback protection, like gambling. This generally applies to businesses with elevated fraud rates and consequently, higher chargeback ratios), and some other parameters.
Convenience Fees: Not all businesses are authorized to impose convenience fees on their customers. Depending on their MCC, it is determined whether a business can apply convenience fees to their customers or not. For instance, fuel stations are allowed to pass on surcharges to their customers.
For Credit Card Holders:
Reward System:
Credit card issuing companies generally offer rewards every time a customer uses their credit card. However, they don't provide the same reward rate for all categories. For example, the SBI Cashback credit card offers 5% cashback on online shopping, 1% on utility bill payments, and no cashback on certain categories like rent payment and government payments. Card issuers, like SBI Card, examine a merchant's MCC to determine its business category and then set the reward rate accordingly.
Tax Purposes:
Certain transactions need to be reported to the income tax department, such as rent payments. Card issuers can identify such transactions based on MCC.
What If a Business Has the Wrong MCC?
Card networks such as Visa, Mastercard, and Amex assign MCCs to merchants based on their business categories. However, sometimes merchants are assigned the wrong MCC. This mistake usually occurs from the payment gateway provider's end. Sometimes, merchants provide incorrect information about their business to obtain a lower MDR. In some cases, local agents of payment gateway providers intentionally assign wrong MCCs for various reasons.
A wrong MCC can affect both the merchant and the customer. Nowadays, card issuing companies offer rewards and report certain transactions to the income tax department based on the merchant’s MCC. Let me give you a real life recent examples of such cases:
Recently, one of our TechnoFino Community members stayed at a Sofitel hotel and used his SBI Cashback credit card to pay for the stay. After a few days, he noticed that SBI Card had charged him Rs. 199+GST, and he didn't receive any reward for that transaction. When he contacted SBI Card for clarification, the response was shocking. The MCC of the Sofitel property was categorized as "property management/rent payment," so they charged him Rs. 199+GST as rent payment processing fees. As per the terms and conditions of rent payment, he didn't receive any reward.
Imagine, a hotel stay being categorized as rent payment. Forget the reward and extra fees; if the amount exceeds a certain threshold, he could be penalized by the IT department for not deducting TDS on such payments.
This was just an example; wrong MCC or MCC miscoding is a real and common problem. Card issuing companies are not liable; it's the acquiring bank that is responsible. Payment gateway providers should be more careful while assigning MCCs to merchants. Credit card rewards are essential for cardholders, and due to MCC miscoding, many cardholders don't receive the expected rewards they're eligible for. RBI should establish strict guidelines for all payment gateway providers to minimize mistakes. If payment gateway providers display a merchant's MCC on the OTP page for online transactions and on the POS machine for offline merchants, this MCC miscoding problem could be effectively resolved. This step would also help consumers easily identify a merchant's business category.
The Importance of MCC:
Merchant Category Codes (MCCs) hold significance for both businesses and consumers, mainly due to their influence on Merchant Discount Rates (MDR).
For Businesses:
MDR Percentage: MDR constitutes a fee charged by payment gateway providers to merchants for accepting credit or debit card payments. MDR percentages are determined based on the MCC of a business. Depending on the MCC, MDR can differ for various categories. For instance, payment gateways typically apply an approximate 1% MDR for businesses categorized as educational services and around 1.3% MDR for those categorized as grocery shops.
Business Risk Assessment: Merchant acquirers and payment processors usually evaluate a business's relative risk based on their business type, directly linked to the MCC. This evaluation aids in determining various aspects such as MDR fees (higher-risk businesses entail higher MDR), payment approval rates (credit card issuers might decline payments to high-risk businesses like gambling), chargeback protection (higher-risk businesses might receive reduced chargeback protection, like gambling. This generally applies to businesses with elevated fraud rates and consequently, higher chargeback ratios), and some other parameters.
Convenience Fees: Not all businesses are authorized to impose convenience fees on their customers. Depending on their MCC, it is determined whether a business can apply convenience fees to their customers or not. For instance, fuel stations are allowed to pass on surcharges to their customers.
For Credit Card Holders:
Reward System:
Credit card issuing companies generally offer rewards every time a customer uses their credit card. However, they don't provide the same reward rate for all categories. For example, the SBI Cashback credit card offers 5% cashback on online shopping, 1% on utility bill payments, and no cashback on certain categories like rent payment and government payments. Card issuers, like SBI Card, examine a merchant's MCC to determine its business category and then set the reward rate accordingly.
Tax Purposes:
Certain transactions need to be reported to the income tax department, such as rent payments. Card issuers can identify such transactions based on MCC.
What If a Business Has the Wrong MCC?
Card networks such as Visa, Mastercard, and Amex assign MCCs to merchants based on their business categories. However, sometimes merchants are assigned the wrong MCC. This mistake usually occurs from the payment gateway provider's end. Sometimes, merchants provide incorrect information about their business to obtain a lower MDR. In some cases, local agents of payment gateway providers intentionally assign wrong MCCs for various reasons.
A wrong MCC can affect both the merchant and the customer. Nowadays, card issuing companies offer rewards and report certain transactions to the income tax department based on the merchant’s MCC. Let me give you a real life recent examples of such cases:
Recently, one of our TechnoFino Community members stayed at a Sofitel hotel and used his SBI Cashback credit card to pay for the stay. After a few days, he noticed that SBI Card had charged him Rs. 199+GST, and he didn't receive any reward for that transaction. When he contacted SBI Card for clarification, the response was shocking. The MCC of the Sofitel property was categorized as "property management/rent payment," so they charged him Rs. 199+GST as rent payment processing fees. As per the terms and conditions of rent payment, he didn't receive any reward.
Imagine, a hotel stay being categorized as rent payment. Forget the reward and extra fees; if the amount exceeds a certain threshold, he could be penalized by the IT department for not deducting TDS on such payments.
This was just an example; wrong MCC or MCC miscoding is a real and common problem. Card issuing companies are not liable; it's the acquiring bank that is responsible. Payment gateway providers should be more careful while assigning MCCs to merchants. Credit card rewards are essential for cardholders, and due to MCC miscoding, many cardholders don't receive the expected rewards they're eligible for. RBI should establish strict guidelines for all payment gateway providers to minimize mistakes. If payment gateway providers display a merchant's MCC on the OTP page for online transactions and on the POS machine for offline merchants, this MCC miscoding problem could be effectively resolved. This step would also help consumers easily identify a merchant's business category.
