It’s no surprise to anyone that banks and card brands label our industry as “high-risk.” When it comes to banking, that label is given a Merchant Category Code (MCC). There are hundreds of them. They consist of four-digit numbers that help acquirers, issuers and card brands better understand what is being processed through the network by describing the type of goods or services provided. The code is set by the International Organization for Standardization (ISO), and card processors are responsible for assigning an MCC to a merchant at the start of their relationship.
The adult industry’s code is 5967 which stands for direct marketing inbound. How the adult industry ended up under direct marketing inbound, I have no idea. It’s fallen under that classification my entire career in this business and that’s 22 years! What makes MCC codes scary? Merchants get classified as high-risk when their business type tends to create higher chargebacks and fraud. The code is issued by banks as part of their risk strategy and can impact approval rates.
Back in 2014 the U.S. government put Operation Choke Point into place. It identified key industries as high-risk and placed more scrutiny on banks supporting those industries. These industries could easily be traced by their assigned MCC codes. Banks began to turn away business or close accounts identified, making it more difficult for businesses to obtain banking facilities. In 2017, the Trump Administration ended Operation Choke Point stating that it was not eliminating risk but was instead discriminating against legal businesses.
How did I get labeled with an MCC Code?
All merchants are assigned an MCC code at the time they are approved by their acquirer. The code indicates what types of services or products they offer to customers. It’s easy to understand that industries like adult, firearms, and payday loans would fall into a high-risk category but there are so many others, and some might surprise you. For example:
- Furniture and electronic stores selling high priced items with delayed shipping.
- Online dating services due to customer complaints, high chargebacks, and other fraud.
- Travel services like air carriers, passenger railways, taxis, limos, and cruise lines which are susceptible to fraud and chargeback issues due to cancelations.
- Mainstream subscription services like health clubs, TV or radio subscriptions and more due to negative options which can be deceptive to the consumer and cause chargebacks.
- Gambling including betting, casino lottery and wagers since there can be legal challenges and reputational concerns.
- CBD, Vape, Cigarettes, and nutrition due to the question of is the product legal in its jurisdiction.
- High volume and high price point merchants including things like precious stones, metals, watches, jewelry, mobile homes, and high-end rentals.
- Merchants with a marketing plan focused on countries that are vulnerable to fraud.
Basically, high-risk MCCs come with higher billing rates that are passed along by the acquirers who are open to accepting the additional risk. The adult MCC code can impact your approval rates by five to ten percent. This is when the issuing bank deems the 5967 transaction as risky and will not approve it. The consumer is then left to contact their bank to ask why and let the bank know they’d like for the purchase to go through. What if a bank or a merchant represents their business to be different from the code it was assigned to? Card brands will consider this miscoding and fines can be passed on to the merchant and the merchant account can be closed.
Do Acquirers and Banks Like Working with Adult?
Many acquirers do enjoy working with adult merchants because of the higher margins they can earn from the processing. Good adult merchants also have very low chargeback and fraud rates, making them desirable by many banks. Banks solely focused on mainstream processing face a very competitive market and find it difficult to be profitable, requiring massive amounts of volume to do it. So, if banks like working with adult merchants and adult merchants have low chargebacks, why is our business model deemed high-risk? Unfortunately, it is reputational damage that hurts our industry. The reputational concerns have impacted the card brands as well. Last October, Mastercard implemented its most extensive content monitoring and age verification regulations in several years to help address reputational concerns. I suspect Visa will mirror that same regulation soon.
Steps to Overcoming Reputational Concerns
What can we do to improve and overcome the reputational concerns acquiring banks and banking partners have? Go out of your way to be compliant. Here are a few things you should consider:
- Have your content policies up to date. Even if you produce content or purchase content, have an internal policy that outlines what those policies are to ensure all produced content is compliant.
- If you’re a cam or fan site or any other type of program that focuses on user-generated content, not only do you need human moderators, but invest in artificial intelligence tools or software to help your team.
- If you have user-generated content, have a strong age verification solution in place. Be sure you are leveraging a third-party solution to help you validate the driver’s license or passport provided by the content creator or model.
- Keep your chargeback and fraud rates low and have a well-documented risk management policy which details your fraud strategy and refund policy.
- Be sure to have a content removal link located on your site. This is per the Mastercard regulations- there must be a way for end users to report unacceptable content. You must also provide reports on these requests to your acquirer or payment facilitator. And keep these reports on file so you can actively show you are acting on concerns. If you have problematic content that gets identified by your acquirer or card brand, you can show that you are acting on content complaints and might have already self-identified the problem.
While all this seems like extra work, if you can present a strong risk management strategy to your acquirer, it will help them continue to be comfortable supporting adult merchants. If you have a problem, show that you have a strong process in place to handle it. This will help you get through the issue and help you keep your processing arrangements. MCC codes are not going away but knowing what they are and how they impact your type of business can make them less scary.