High-Risk MCC Codes

A Merchant Category Code (MCC) is a four-digit code assigned to businesses based on the type of goods or services they offer. It helps categorize businesses for tax purposes and assess their risk level. If your business is in a high-risk industry, your payment processor may assign a high-risk MCC codes, indicating that the products or services you sell are considered too risky by banks or payment processors. The MCC assigned to your business reflects the risk level tied to the services you provide.

Businesses with high-risk MCCs often face challenges in securing payment processing services because of the higher likelihood of fraudulent activities or chargebacks. Payment processors share this risk and could face legal or financial consequences if your business encounters issues, leading many to avoid high-risk businesses. The MCC is used to determine the type of business you run and the level of risk it presents. This article will discuss how a high-risk MCC impacts your business, common MCC codes, and ways to secure a reliable payment processor even with a high-risk classification.

Understanding Merchant Category Codes (MCC) and Why They Matter

You might wonder why a specific code is assigned to each business when a merchant already has their unique Merchant Identification Number (MID). The MCC code doesn’t represent an individual merchant but the industry they work in. These are four-digit numbers used by credit card networks to classify businesses based on the products or services they offer.

These codes serve a variety of functions for credit card companies, from setting fees to monitoring spending and ensuring tax compliance. MCCs hold particular importance for businesses in industries considered higher risk.

Here’s how MCCs play a critical role:

• Setting Interchange Fees: MCCs help credit card companies determine the interchange rates and processing fees applied to different businesses. Merchants operating in higher-risk industries, like gambling or adult entertainment, often face higher fees because of the increased risk of fraud and chargebacks.
• Monitoring Spending and Reward Programs: Credit card issuers use MCCs to track how customers spend across different categories. This helps them calculate and distribute rewards, such as cash back or points, for purchases made in specific categories like travel, dining, or retail.
• Supporting Tax Reporting and Compliance: Certain transactions, especially those involving payments to contractors or service providers, may need to be reported to tax authorities. For example, payments over $600 to contractors must be reported on a 1099 form, and MCCs assist in identifying transactions that require reporting for tax purposes.

Businesses in certain sectors are assigned high-risk MCCs because they are more likely to experience fraud or chargebacks. These industries often face greater scrutiny and stricter regulations. Examples of high-risk industries include online travel agencies, gambling, adult services, pharmaceuticals, specific marketing and sales operations, and certain digital goods (e.g., streaming services)

Companies in these sectors generally face higher processing fees and must meet more stringent compliance standards due to their high-risk classification.

What Is a High-Risk MCC?

MCCs deemed high-risk are generally associated with industries where transactions are subject to stringent regulations, a higher likelihood of customer disputes, or increased risks of fraudulent activities. These sectors often provide goods or services that can be easily refunded or are delivered digitally, making them more susceptible to chargebacks and other transactional issues. For example, the gambling industry is tightly regulated and frequently deals with customer disputes, resulting in elevated chargeback rates.

Other factors that contribute to a business being classified as high-risk include the transaction size and the gap between payment and service delivery. Travel agencies are a prime example, as they often collect payments well in advance of a trip. Unforeseen events like weather-related cancellations can lead to chargebacks that the business cannot control, which is why airlines and travel agencies are typically categorized as high-risk by payment processors.

Being designated under a high-risk MCC can greatly influence a company’s interactions with payment processors and financial institutions. These businesses usually face higher processing fees, more restrictive contract terms, and increased scrutiny during transactions and the onboarding process. High-risk payment processors and gateways implement these stringent measures to mitigate potential financial risks.

Additionally, businesses operating within high-risk categories may encounter limited options for securing merchant services, as many banks and financial institutions are hesitant to partner with them. This limitation can result in fewer choices for payment processing, making it more challenging for these businesses to find affordable and reliable solutions.

How High-Risk MCC Codes Impact Your Business?

High-risk Merchant Category Codes (MCC) are used in the payment industry to assess the risk associated with a business. These four-digit codes categorize industries that are more likely to face fraud, chargebacks, or regulatory issues. Merchant account providers rely on these codes to evaluate whether a business is too risky to offer services. Industries like gambling, adult entertainment, and cryptocurrency are common examples of high-risk categories.

Due to the financial losses caused by fraud and chargebacks, traditional banks usually avoid working with high-risk businesses to reduce liability. Providers that do serve high-risk merchants often require extra precautions, such as holding a portion of the merchant’s revenue in a reserve account for added security. High-risk MCCs also help with regulatory compliance and fraud prevention, as they enable monitoring of industries prone to suspicious activities. Businesses with high-risk MCCs typically face higher fees and stricter conditions to maintain their payment processing services.

Common High-Risk MCC Codes

Below, we have shared the list of the MCC codes for the commonly known high-risk industry types. Let’s take a look.

Note that this is just a few to name. Many industries are not listed here but are considered high-risk and assigned an MCC code based on their risk level. You must work with a reputable payment processor to get your MCC code.

How to Find Your High-Risk MCC?

Identifying your high-risk MCC can be tricky, as it depends on the payment processor or acquiring bank you work with. Here are some steps to help you find your MCC:

• Consult Your Payment Processor or Acquiring Bank: The most straightforward way to determine your MCC is to ask your payment processor or acquiring bank. They assign the code when you set up a merchant account and can confirm if your business is classified as high-risk. This classification affects your processing fees, underwriting requirements, and other account conditions, so maintaining clear communication is crucial.
• Use MCC Code Lookup Tools: There are online tools available that let you search for MCC codes based on your business type. While these tools can help you find general MCC information, they might not indicate if the code is considered high-risk. A simple online search for “MCC code lookup” will lead you to various options.
• Review Industry Guidelines: Visa, Mastercard, and other payment networks maintain lists of MCC codes specific to high-risk industries. Sectors like online gambling, adult entertainment, and cryptocurrency exchanges are commonly categorized as high-risk. You can check these lists or industry forums to see how similar businesses are classified.
• Consult Industry Experts: If you’re unsure about your MCC, you can reach out to industry consultants who specialize in high-risk businesses. These professionals often have extensive experience with MCC codes and can guide you based on your specific industry.
• Monitor High-Risk Industries: Certain MCC codes are commonly associated with high-risk sectors, such as adult entertainment (MCC 7841), online gambling (MCC 7995), telemarketing (MCC 5966), and cryptocurrency (MCC 6051). Understanding the typical MCC codes for your industry can give you insight into your risk classification.

By following these steps and staying in regular contact with your payment processor, you can stay informed about your MCC code and any related risks. Knowing how your MCC affects fees, chargebacks, and processing terms will help you better manage your financial operations.

Why High-Risk Businesses Need Specialized Merchant Accounts?

Businesses classified as high-risk typically require a high-risk merchant account to process credit card payments. These businesses operate in industries with higher chargeback rates, legal complexities, or financial instability, making them more prone to fraud or disputes. Because of the increased risks, traditional banks and payment processors often avoid working with them, so specialized accounts become necessary.

High-risk merchant accounts are designed to handle the unique challenges of these businesses. They offer enhanced fraud prevention tools and chargeback management services, which help mitigate the financial impact of disputed transactions and fraudulent activities. Industries like travel, adult entertainment, and subscription services often face these issues, making the added protections essential.

In addition, high-risk merchant accounts provide global payment flexibility, allowing businesses to process multi-currency and international transactions. This is especially important for companies looking to expand globally, as traditional low-risk accounts may not support these needs.

These accounts also offer tailored solutions for high-risk activities, such as recurring billing, higher transaction volumes, and specialized monitoring tools. They provide advanced security features, including fraud detection systems, encryption, and secure payment gateways, to protect both the business and its customers from fraudulent transactions.

Providers of high-risk merchant accounts are familiar with the challenges in industries like online gaming, pharmaceuticals, and debt collection. They help businesses remain compliant with regulations and offer high levels of security. However, these accounts come with higher fees and stricter contract terms. Providers often impose rolling reserves, holding a portion of the business’s funds to cover potential chargebacks, which can impact cash flow.

Compliance Strategies for High-Risk Merchants

To comply with the new Visa Integrity Risk Program (VIRP), high-risk merchants, especially those categorized under specific Merchant Category Codes (MCCs), must adopt several strategies to reduce their risks and ensure compliance.

• One key strategy is communicating refund and cancellation policies to customers. By making these policies easy to understand and consistently applying them, merchants can minimize disputes and reduce chargebacks, helping to stay within VIRP guidelines.
• Protecting cardholder data is another priority, and tokenization is an effective method. Tokenization replaces sensitive card information with a non-exploitable token, keeping data secure and compliant with industry standards. Storing this data in a third-party vault further reduces the risk of fraud and breaches.
• Merchants can also benefit from a multi-payment service provider (multi-PSP) strategy. By working with multiple PSPs, businesses can spread out risks, improve resilience, and optimize transaction costs. This approach also ensures compliance and offers flexibility in adapting to payment system changes.
• For industries like adult content, dating services, and gambling, age verification is now mandatory. Merchants must implement systems to verify customer ages, often using third-party tools, and ensure compliance with local laws. This applies to both user-generated and studio-produced content, and proper documentation is required.
• Finally, high-risk merchants must register under the correct MCC categories and pay any required fees, including an increased annual registration fee from $500 to $950 per acquirer. Regular compliance audits are essential to avoid violations and maintain alignment with VIRP standards.

Conclusion

Understanding and managing high-risk MCC codes is crucial for businesses operating in industries prone to chargebacks, fraud, or regulatory scrutiny. These codes directly impact a business’s relationship with payment processors, often leading to higher fees and stricter terms.

By staying informed about their MCC classification and working with specialized merchant account providers, high-risk businesses can mitigate risks, ensure compliance, and maintain secure payment processing. Implementing strategies like clear refund policies, data protection measures, and compliance with industry standards will help high-risk businesses navigate these challenges effectively.

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