For most businesses, chargebacks can be a major concern, risking profits and complicating financial relationships. But what if you could tackle this issue head-on? Knowing about Merchant Category Codes (MCC) and how they affect chargeback rates is essential for any business owner.
Being aware of the risks of misclassifying your business and utilizing low-risk MCC codes can help you protect your business from chargeback penalties and a damaged reputation. Analyzing chargeback data is crucial in understanding and mitigating chargeback risks. Let’s explore how you can effectively safeguard your business against unnecessary chargebacks.
What are Merchant Category Codes?
Merchant Category Codes (MCC) are four-digit numbers that classify businesses based on their products or services. Credit card networks and payment processors use these codes to categorize transactions, influencing things like fees and how transactions are handled during disputes.
For instance, a jewelry store might be assigned MCC 5944, while a restaurant would fall under MCC 5812. When a customer makes a purchase, this code is attached to the transaction, helping banks and payment processors understand the type of business involved. This helps determine the appropriate way to process the transaction, especially if a dispute arises. Consumers can find their merchant category codes on their credit card statements to better understand their spending categorization.
Picture a customer purchasing a laptop from an electronics store (MCC 5045). If the customer later disputes the charge, the MCC helps the credit card company identify the type of transaction, which could impact how the dispute is resolved. MCC codes act as a hidden layer of classification, ensuring transactions are sorted correctly.
What Classifies as a Low-Risk MCC Code?
Low-risk MCC codes belong to industries with lower rates of fraud and disputes. These businesses often provide straightforward products or services, have clear pricing structures, and offer well-defined return policies. Customers in these sectors generally understand what they’re purchasing, leading to fewer misunderstandings and disputes. Low-risk businesses often benefit from lower transaction fees and better terms with payment processors.
For example, restaurants (MCC 5812) offer a simple transaction—customers pay for a meal they’ve already received. This clarity reduces the chances of disputes, making the restaurant industry a low-risk category. On the other hand, businesses with complex service models or subscription-based offerings tend to face more challenges in this area. The fees businesses pay can vary significantly based on their MCC code, with low-risk categories generally incurring lower fees.
Examples of Low-Risk MCC Codes
Here are a few examples of low-risk MCC codes:
- MCC 4812 – Telecommunications Equipment and Telephone Sales
- MCC 5045 – Computers, Peripherals, and Software
- MCC 5734 – Computer Software Stores
- MCC 5812 – Eating Places and Restaurants
- MCC 7399 – Business Services (Not Elsewhere Classified)
- MCC 5811 – Caterers
- MCC 5944 – Jewelry Stores
- MCC 5999 – Miscellaneous and Specialty Retail Stores
These MCC codes represent low-risk businesses that typically enjoy lower transaction fees and fewer chargebacks.
These businesses tend to have more predictable transaction models, with clear-cut services or tangible products, reducing the potential for misunderstandings or disputes.
How Do They Help with Chargeback Prevention?
Low-risk MCC codes can reduce chargeback risks by placing businesses in categories where disputes are less common. Banks and payment processors often see transactions from these industries as safer and less prone to fraud or customer dissatisfaction.
Understanding why chargebacks happen—whether due to merchant error, criminal fraud, or friendly fraud—can help businesses take targeted measures to prevent them.
Take the example of a restaurant (MCC 5812). Customers know exactly what they’re paying for—there’s little room for confusion. If an issue arises, it’s typically resolved on the spot, leaving less chance for a chargeback to occur. In contrast, industries that deal in complex digital goods or services often see higher rates of disputes, as customers may not fully grasp what they’re receiving.
In another case, an electronics store (MCC 5045) sells well-defined products with specific features and warranties. This level of clarity means customers are less likely to be surprised by their purchase, which reduces the chances of filing a chargeback later on.
For business owners, operating under a low-risk MCC code means fewer disputes, less friction with payment processors, and a reduced risk of financial loss due to chargebacks.
The Risks of MCC Miscoding
Using the wrong Merchant Category Code (MCC) can cause a lot of problems for your business. Misclassifying your business doesn’t just affect your payment processing—it can lead to higher fees, compliance headaches, and even damage your reputation with banks and payment processors. High-risk businesses often face increased scrutiny and higher transaction fees, making accurate MCC classification crucial.
Misclassification can lead to difficulties in opening and maintaining merchant accounts, especially for high-risk businesses.
Increased Transaction Fees
If your business is mistakenly assigned a high-risk MCC, you could end up paying much higher transaction fees than necessary. Incorrect MCC classification can significantly increase the fees businesses pay, cutting into profits, especially for small businesses. For example, a jewelry store that’s incorrectly classified as a high-risk service provider might get stuck with hefty fees that don’t match the actual risk of its sales.
Wrong Interchange Rates
MCC codes directly affect interchange rates, which vary by industry. A low-risk business should get lower rates, but miscoding can lead to paying more interchange fees than you should. This can take a toll on your finances, especially if you’re already working with slim profit margins.
Regulatory and Compliance Challenges
Each MCC code has its own set of compliance rules. If your business is misclassified, you might find yourself dealing with requirements that don’t apply to you—or worse, missing out on ones that do. This could lead to costly regulatory issues or fines that you didn’t see coming.
Risk of Losing Your Merchant Account for High-Risk Businesses
Payment processors rely on MCC codes to evaluate the risk of doing business with you. Accurate MCC classification is crucial for maintaining merchant accounts. If your business is incorrectly classified as high-risk, it could lead to unnecessary scrutiny or even cause your merchant account to be terminated. On the other hand, if you’re coded as low-risk when you’re actually high-risk, the processor might shut down your account once they catch the mistake.
Damaged Reputation
Being misclassified can also hurt your reputation with financial institutions. If they think your business doesn’t match the MCC you’ve been assigned, it could affect your credibility. This can make it harder to build relationships with banks and payment processors down the line. For example, a restaurant coded as a financial services company might face unnecessary hurdles when trying to set up accounts or secure funding.
Conclusion
Choosing the right MCC code makes a huge difference for business owners looking to cut down on chargebacks. Low-risk MCC codes are connected to industries with clear, straightforward transactions, which means fewer disputes and a lower chance of chargebacks. This not only helps protect revenue but also keeps business operations running smoothly and strengthens relationships with payment processors.
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