High-Risk MCC Codes

MCC or Merchant Category Code is a four-digit code assigned to each merchant across different industries. The code aims to identify the types of goods and services the merchant offers and assess their risk level. MCCs are primarily used to determine the business type and are often used for taxation purposes. Your payment processors might assign you a high-risk MCC if you fall into the high-risk industry type, i.e., the goods and services you sell are too risky for the merchant service provider or banks you have a merchant account with. The payment processor will select your business type’s most suitable merchant category code to recognize your risk level.

Nearly every business that accepts credit card payments or has a merchant account with a bank, payment processor, or any financial entity needs MCC. A high-risk MCC means your business is at an increased risk of experiencing fraudulent activities or chargeback requests. Businesses with high-risk MCCs often struggle to find a reliable payment processing service provider. That’s because the payment processor also bears the risk of the chargeback and refund requests.

Besides, if your business gets stuck with any legal issue, your payment processor will also be held responsible. They might have to bear the legal consequences of processing your credit card payments. That’s why a vast majority of payment processors avoid working with companies deemed high-risk. They use Merchant Category Code to identify your business type and the associated risk. In this post, we’ve explained how having a high-risk MCC code will affect your business operations, some popular MCC codes for different types of businesses, and how you can secure a merchant account with a reliable processor despite being recognized as a high-risk business. Let’s take a look.

Understanding High-Risk MCC Codes

When you apply for a merchant account with a bank or a payment processor, you will be assigned MID (Merchant Identification Number). It’s a unique code used to identify individual merchants. The payment processor also attaches a unique MCC code to the MID to verify the merchant’s industry type. As mentioned above, some merchants are assigned a high-risk MCC code representing a merchant in the high-risk industry. Most processors evaluate the merchant’s MCC code to determine the risk level they will be exposed to before accepting their merchant application.

MCC codes have multiple applications, but their primary use is in setting the rules and conditions for the merchants operating in specific industries. Payment service providers will quote a custom price to merchants with a high-risk MCC code and offer incentives and other services according to their industry type and risk status.

Payment processors and popular card networks like Visa and MasterCard have set specific regulations for merchants with different MCC codes. These regulations are developed to protect card networks, issuing banks, acquiring banks, and payment processors from financial loss due to the merchant’s industry type. As mentioned previously,  card networks and the entire payment ecosystem that facilitates payment processing for high-risk businesses have to bear the risk associated with these businesses.

So, they mitigate these risks by imposing stringent security policies and strict registration processes for businesses with a high-risk MCC code. The aim is to secure the payment ecosystem that processes credit card transactions for high-risk companies while providing a seamless transaction experience to their customers.

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.

Use of MCC Codes

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 codes are especially important for high-risk merchants, as they give banks and financial institutions a clear idea of the risk level associated with the company they collaborate with. As mentioned previously, this information is crucial for determining whether the business that has applied for a merchant account is too risky for the payment service provider.

Dealing With the Chargebacks

Customers file a chargeback when they are unsatisfied with the end product or believe the services they received were not what the service provider claimed. They can also issue a chargeback if they notice an unusual transaction on their credit card statement. That happens when their credit cards are charged without consent or a fraudster steals and misuses them. The higher the chargeback ratio of a company, the more losses it incurs and the higher its risk level. Banks and payment service providers check the chargeback ratio to assess the company’s risk level.

You will be surprised that 81% of the chargebacks are filed without a legitimate reason. It’s called friendly fraud, where a customer issues a chargeback just to get their money back. For instance, a customer might be fully satisfied with the product and have no intention to return it, but they might claim that the product was broken or wasn’t up to the mark. The worst part is these customers are highly likely to repeat this fraud. Once they know the chargeback can help them regain their money, they will use it to recover their spending.

It is not just the merchant exposed to the chargeback risk; the high number of chargebacks puts the merchant service provider at risk, too. When a chargeback request is issued, it costs your processor a lot of time to manage it. There’s also a chance the merchant might go bankrupt or experience legal trouble because of the high number of chargeback requests, putting the payment processor’s reputation and money at risk.

Therefore, a traditional bank is highly likely to reject the application of a merchant assigned a high-risk MCC code. Some payment processors have listed the industry types they don’t work with and the eligibility requirements for the merchant to qualify for the merchant account. This mainly includes evaluating their chargeback ratio.

Others might be willing to accept some high-risk businesses, given that they have a proven track record of minimal chargebacks and a good financial history. Some providers, such as PaymentCloud and Host Merchant Service Providers, specialize in working with high-risk merchants. The only downside to these providers is the high processing fee with multiple hidden charges.

These providers might also impose a reserve requirement, i.e., keeping aside a small portion of the business’s income from credit card sales if it experiences financial loss due to repetitive chargebacks. Implementing such regulations and a higher processing fee might seem harsh, but for a high-risk merchant, it’s the cost of being categorized as risky.

Risk Management

Chargeback isn’t the only type of risk that a merchant service provider bears. High-risk MCC codes are used to determine the risks associated with these businesses. The unique MCC code is assigned to each business to know their vulnerability to fraud and other security issues. For instance, a business that reports high volume, high-ticket transactions is at an increased risk of credit card fraud, as fraudsters mostly target industries that conduct large-sized transactions.

A business that sells luxury products, such as precious metals, is more likely to experience fraudulent activities than a general retail store selling groceries. With a unique MCC code assigned to each industry type, it becomes easier for the merchant service provider to assess the merchant’s risk level and know what they are dealing with. Based on this, they can take measures to mitigate the security risks associated with credit card transactions.

Regulatory Compliance

Regulatory compliance is another reason why high-risk MCC codes are assigned to merchants falling into the high-risk category. In some states, legal entities categorize certain businesses as risky because of their vulnerability to money laundering, fraudulent activities, terrorist financing, and other legal matters that might threaten the business, its customers, and society.

Knowing which industry falls into the high-risk category will help financial institutions monitor their credit card payments and other financial activities and take necessary steps to mitigate the risk of fraud. Each business has to comply with anti-money laundering (AML) and other anti-fraud activities. Financial institutions responsible for tracking these transactions and preventing fraud can easily locate the businesses they need to monitor using the MCC code.

Do Businesses Classified as High-Risk Need a High-Risk Merchant Account?

Businesses of all types, sizes, and risk levels need a merchant account to process credit card payments. Suppose you accept card-present and card-not-present transactions (whether at the retail store, online, or combined). In that case, you must work with a payment processor who can handle the backend process of evaluating and transferring the funds to your bank.

Credit card payments are primarily held in your merchant account. These are verified by your payment processor, card network, customers’ issuing bank, and other financial institutions in the payment ecosystem before they are transferred to your bank. These payments are often processed in batches.

When a customer swipes a credit card at your POS system or makes an online payment, your payment processor will verify the details and forward it to the card network. The card network verifies the details with the customer’s issuing bank to ensure they have enough funds to process the payment. Once the issuing bank gives the green light, the payment is accepted, and the merchant gets a notification stating that the amount has been paid. Likewise, a credit card payment can be rejected by the merchant’s payment processor or customer’s issuing bank for financial or legal reasons.

A high-risk merchant must work with a reliable and professional payment processor with experience managing high-ticket transactions. They need to find someone who can manage chargeback disputes on the merchant’s behalf and offer top-notch security tools to mitigate the risk of fraudulent activities. Simply put, they must find a payment processor willing to offer a full-fledged POS terminal, a virtual terminal, a payment gateway, and the required payment infrastructure to facilitate uninterrupted and secure transactions.

Note that a payment processor who serves high-risk businesses will offer services designed specifically for these industries. For instance, they will have a high chargeback threshold for the merchant, state-of-the-art technology to detect and prevent fraud, and a robust team that offers industry-specific support services.

Common Challenges Faced By High-Risk Businesses

Businesses classified as high-risk face many difficulties in finding the right payment processor. That’s because most processors decline to work with these businesses. Those who accept high-risk merchants have a rigorous process of accepting their applications. Let’s look at some of the common challenges a high-risk merchant faces.

Strict Underwriting Process

Financial institutions that accept high-risk merchants have a rigorous testing process for each applicant. They will carefully review your application, understand your industry type, review your MCC code, and request additional documentation that helps them understand your business function and risk level.

The process is comparatively more time-consuming and hectic than that for low-risk businesses. A simple grocery store owner can expect their merchant account application to be approved within 1-2 business days, while it may take up to a week or longer for a high-risk business. You must be ready with the required documentation, including your bank account statement, financial history, and credit reports.

Higher Processing Fee

Your merchant service provider will evaluate your MCC code before quoting a price. If you have researched payment processors, you may have noticed most of them serving the high-risk industry have not disclosed their pricing on their website. After reviewing your application, industrial risk level, and individual risk status, they quote a custom price. You can expect the processing fee to be considerably higher than the standard rate charged to a low-risk business.

Rolling Reserve

Another challenge a high-risk business faces is the requirement for a rolling reserve. It refers to the amount set aside by your payment processor to mitigate the risk of financial loss or chargeback. The rolling reserve is a specific percentage of your revenues and is stored for a specified period. Although the reserve is returned to the merchant, there’s a chance the payment processor might have to use it to refund your customers or meet the chargeback request.

Conclusion

Businesses assigned a high-risk MCC code do not necessarily face a hard time finding a reputable payment processor. However, it does take patience and a lot of research to get a merchant account with a company that serves high-risk merchants.

The biggest challenge is finding someone who doesn’t impose a ridiculously high processing fee or hidden charges. Unfortunately, there’s no way you can request the payment processor or the card network to grant you an MCC code of your choice. It’s pre-determined based on your industry type. Even if you have a low chargeback ratio or no history of financial or legal issues, you might be categorized as a high-risk merchant if your business type has a high-risk MCC code.

Check All MCC codes with Merchant Category Code Finder (MCC)