Common High-Risk MCC Codes

Merchant Category Code, or MCC, is a four-digit number categorizing a business’s industry. However, specific MCC codes are linked to higher risk because of the nature of the products or services those businesses offer.

These high-risk MCC codes play a significant role in evaluating risk and preventing fraud. They help financial institutions identify potential weaknesses and take appropriate steps to protect against fraudulent activities. Knowing these standard high-risk MCC codes is crucial for financial institutions, payment processors, and regulatory bodies to effectively handle and reduce risk in the constantly changing economic environment.

Understanding Merchant Category Codes

Merchant Category Codes (MCCs) consist of four-digit numbers issued by the major card brands: Discover, Visa, American Express, and MasterCard. Each MCC corresponds to a specific industry and is assigned based on your business model. These MCCs are crucial for card networks to determine various aspects, such as eligibility for reward points on purchases, placing restrictions on specific transactions, and assessing whether you should report a payment for tax purposes. 

Moreover, particular merchant category codes play a role in identifying whether your business falls under the category of high-risk, which may subject it to risk monitoring and registration requirements with Visa and Mastercard.

Why is the MCC List Important?

Merchant category codes (MCCs) are relevant for businesses and consumers. They exert influence on various aspects that impact businesses, which include:

●     Interchange Rates: MCCs play a pivotal role in determining the interchange rates, representing the fees imposed on businesses for every debit or credit card transaction they process.

●     Risk Assessment: Card companies use MCCs to assess the risk associated with a business, affecting the terms and conditions under which they operate.

●     Credit Card Processing Fees: The fees for processing credit card payments may be influenced by the MCC assigned to a business.

●     Specialized Features: MCCs can also determine whether a business is eligible for specialized features, such as the ability to charge convenience fees for certain types of transactions.

●     Taxation: The MCC assigned to a business may affect tax payments and how the Internal Revenue Service classifies the company for tax purposes.

On the consumer side, MCCs impact the rewards earned from credit card purchases, particularly in the categories of assets that qualify for specific rewards.

What does it mean to be a “High-Risk” Merchant?

A high-risk MCC code is a specific four-digit numerical identifier allocated to businesses within particular industries. These businesses are usually risky by the payment processors. These codes serve as distinctive markers employed by financial institutions, payment processors, and regulatory authorities for evaluating and managing potential hazards linked to various merchant categories. 

The categorization of an MCC code as high risk typically hinges on several factors, including the nature of products or services offered by these merchants, historical data regarding fraudulent activities within the respective category, and regulatory guidelines governing them.

High-risk MCC codes include various industries like –

● Gambling and Casinos

● Adult Entertainment

● Travel agencies

● Telemarketing

Merchants engaged in these categories may encounter heightened scrutiny and face additional requisites imposed by financial institutions. This happens due to the inherent risks associated with their operations.

Although an MCC code is used for many things, card networks utilize this code to decide interchange fees, establish proper regulations, and provide incentives to merchants depending on the risk factor of the particular industry. Visa and Mastercard, types of card networks have established precise rules and guidelines for enterprises carrying high-risk MCC codes. These regulations play a pivotal role in alleviating the prospective financial perils that could result in substantial losses for card issuers and acquiring banks.

Why Understanding High-Risk MCC is Essential?

High-risk MCC codes serve as a way to convey how much risk a business poses to those involved in the payment industry. In particular, merchant account providers rely on these codes to decide if a business is too risky to offer their services to. Given that chargebacks and fraud result in a loss of $2.40 for every $1 lost, it’s no surprise that merchant account providers are also exposed to this risk.

While traditional banks typically steer clear of dealing with riskier merchants to reduce their liability, providers with a higher tolerance for risk may still require specific conditions for high-risk merchants. These measures might seem strict, but they can substantially decrease the financial losses experienced by business owners.

Merchants categorized as high-risk may encounter several notable ramifications:

● They may incur elevated chargeback fees, which can place a substantial financial burden on their operations.

● High-risk merchants might be compelled to commit to more extended contractual agreements than their low-risk counterparts, resulting in comprehensive contractual obligations.

● These merchants may be required to disburse periodic fees monthly or annually, which further impacts their financial stability.

● An additional financial strain may come in the form of early termination fees should they decide to conclude their association with a payment processor prematurely.

● High-risk merchants often find themselves subjected to a rolling reserve mechanism. Under this arrangement, until transactions are satisfactorily authenticated, the processor withholds a portion of their earnings. This practice can substantially restrict their access to funds.

List of Some Common High-Risk MCC Codes

Remember that this list doesn’t cover all possible high-risk MCC codes, which may differ based on your payment processor or financial institution. It is crucial to refer to the specific guidelines and policies of the institution you’re dealing with to get a complete and current rundown of high-risk MCC codes.

Why a Business Ends Up on a High-Risk Merchant List?

While specific industries are commonly tagged as high-risk due to fraud and chargebacks, any merchant can be in this category. Payment processors consider additional factors about a merchant’s financial practices and history when deciding if a high-risk status is warranted.

● Merchants dealing with a high volume of transactions or those with a high average transaction value often get labeled as high-risk. Specifically, businesses processing over $20,000 monthly or with average transactions of $500 tend to fall into the high-risk category.

● Merchants engaging in international business and accepting multiple currencies are deemed high-risk. Moreover, those accepting payments from countries with a reputation for fraud vulnerability are considered exceptionally high risk. Only a handful of countries, such as the USA, Australia, Canada, and some European nations, are exceptions to this fraud vulnerability risk and don’t lead to a high-risk classification.

● When a new merchant partners with a payment processor, there’s usually little or no transaction history available. Similar to how individuals struggle to obtain a credit card without an established credit history, merchants find it challenging to secure a low-risk status from a payment processor without an existing transaction record.

● Lastly, a low credit score can also result in a high-risk classification.

Many consumers and even some businesses need to familiarize themselves with MCCs and how they’re assigned. A basic understanding of MCCs is essential for grasping the concept of high-risk codes and why they are applied.

MCC assignment is one of several standardization practices. These were developed by the International Organization for Standardization (ISO), a non-governmental organization responsible for creating industrial and commercial standards.

In ISO 18425, merchant category codes were defined to indicate what services or products businesses provide to customers. However, the ISO doesn’t assign these codes, which aren’t universally consistent. Instead, individual payment processors give them.

When a business accepts a credit card as a payment method, the credit card company assigns a code to the merchant based on its products and services. The payment processor might assign multiple codes if a merchant offers numerous benefits. These four-digit MCCs are sometimes updated, removed, or added, so a business’s code can change over time. Credit card companies use MCCs for several purposes:

1. Tracking and limiting transactions

2. Reporting essential tax information to the IRS

3. Compiling data about cardholders’ spending habits

4. Determining whether buyers qualify for rewards points on a purchase

Which High-Risk MCC Code Does Your Business Comes Under?

Identifying your specific high-risk MCC (Merchant Category Code) can prove intricate, given that the categorization of high-risk MCC codes may exhibit variations contingent upon the payment processor or financial institution with which you are affiliated. Below, you will discover a series of steps to assist you in the pursuit of your high-risk MCC code:

●     Ask Your Payment Processor or Bank: Contact your payment processor or acquiring bank and inquire about the MCC code allocated to your business. They are likely equipped to provide information about the MCC code pertinent to your industry. It is advisable to inquire explicitly whether your industry falls under the high-risk category and if any supplementary prerequisites or considerations are associated with your MCC code.

●     Know the Industry Guidelines: Seek out industry-specific guidelines disseminated by payment processors, industry associations, or regulatory entities. These resources may delineate the prevalent MCC codes linked to high-risk sectors. You can also explore industry-specific forums or communities where fellow merchants in analogous sectors exchange insights and experiences about MCC codes.

●     Search MCC Code Online: Online MCC code lookup tools are at your disposal, offering comprehensive insights into MCC codes. Although these tools might not emphasize high-risk MCC codes, they can give you an idea about the MCC code linked to your industry. Remember that these utilities deliver general information and may not precisely reflect your payment processor’s specific classification of high-risk MCC codes.

●     Get Counsel from Industry Authorities: Contact industry consultants, advisors, or experts in your domain. They may be familiar with high-risk MCC codes and can extend guidance and perspectives grounded in their proficiencies.

It is important to remember that the categorization of high-risk MCC codes hinges on what payment processor or acquiring bank you choose. Thus, maintaining transparent communication channels with your payment processor or bank is paramount.

Conclusion

High-risk MCC codes are a pivotal component within the financial landscape, offering a mechanism for identifying and managing potential risks associated with specific merchant categories. These codes are multifaceted, encompassing risk assessment, fraud mitigation, regulatory adherence, and determining eligibility for financial services. Through the stratification of businesses into high-risk MCC codes, financial institutions gain the ability to efficiently allocate resources, enforce rigorous security protocols, ensure compliance with regulations, and make well-informed decisions about merchant services.

However, you might wonder whether your business can still secure a merchant account once assigned a high-risk Merchant Category Code. Encouragingly, the answer resounds with a definitive “yes!” Several payment processing specialists possess the requisite expertise to collaborate with organizations categorized under the high-risk MCC classification.

Frequently Asked Questions

Q: Can the High-MCC code for your business be changed?

Usually, an MCC code is designated by a payment processor, and it can differ from institution to institution. Whether the status can be changed depends on your chosen payment processor. You can give it a shot by submitting a request to change your High-risk status, but ultimately, it depends on your business or industry assessment.   

Q: Does all Merchants come under the high-risk industry category?

No, not all merchants will be regarded as High-risk just because they belong to a particular industry. The designation goes beyond just one factor and may include assessments like: 

● Merchant’s Processing History

● Personal Profile for Risk Assessment

● Compliance with Regulators

Q: What strategies can effectively handle high-risk MCC codes and mitigate the associated risks? 

Employing stringent fraud prevention protocols, upholding steadfast adherence to industry regulations, vigilantly scrutinizing transactions for signs of irregularity, and establishing partnerships with reputable payment processors well-versed in catering to high-risk sectors are integral for risk management in high-risk MCC codes.