Key Takeaways
- Merchant Category Codes (MCCs) are issued by credit card companies to indicate what goods or services a business offers
- Merchants that present a financial risk to the payment processor are assigned a high-risk MCC
- Receiving a high-risk MCC leads to higher fees and limitations on merchant accounts
- Segpay works with high-risk merchants to ensure that their transactions are effectively processed.
It’s nearly impossible for a business in the modern world to grow and succeed without accepting credit card payments from customers. However, some businesses pay higher fees for accepting those payments because they have been assigned high-risk merchant category code (MCC) codes.
Every business is assigned at least one MCC, but some merchants are assigned codes that indicate that they present a financial risk to the payment processor. In order to most effectively navigate the payment system and ensure that merchants and purchases are being categorized accurately, it’s important to fully understand how MCCs operate. More specifically, merchants and customers should be aware of:
- Why certain businesses are considered high-risk
- The consequences of a high-risk cllassification
- Which codes are commonly used for high risk merchants
- How to manage a high-risk classificiation
Merchant Category Codes
Categories of High-Risk Merchants
Payment processors decide whether a merchant is high-risk based on very specific factors, including frequent chargeback and fraud occurrences. There are also specific industries that are automatically believed to present a higher degree of risk than others.
Chargebacks
The concept of a chargeback may be unfamiliar to some customers, but it’s actually a very common practice. Although the term chargeback is sometimes used interchangeably with the word refund, they are actually two different actions.
If a customer makes a purchase and decides later that it does not meet their needs or does not function correctly, they can return the item directly to the merchant. In this case, assuming the customer has followed the stipulations of the return policy, the merchant typically offers a refund of the customer’s money.
On the other hand, a chargeback occurs when a customer disputes a transaction directly with the credit card company rather than going back to the merchant. For example, if a company accidentally charges a customer for the same item twice, the customer might go to the credit card company and request that the second charge be removed. In addition to removing the inaccurate item from the customer’s card, the credit card company also charges the merchant a chargeback fee in exchange for dealing with the disputed transaction.
Fraud
Some industries are particularly vulnerable to forms of fraud, such as when a customer’s credit card is stolen and used by someone other than the cardholder. In this situation, once the cardholder realizes that the card has been used fraudulently, they approach the credit card company to dispute the transaction.
While fraudulent charges may not be the fault of the merchant, they nevertheless present a financial risk to the credit card company. For this reason, merchants that frequently experience fraud are often labeled as high-risk.
High-Risk Industries
The industries that are generally associated with being high-risk are wide-ranging. Likewise, the reasoning for assigning risk to each industry varies based on the services or goods that they provide.
- The adult industry sells items that are controversial or taboo, which can lead to high rates of returns and chargebacks.
- Furniture and electronic stores sell high-priced items that are more susceptible to chargebacks or returns when customers experience buyer’s remorse.
- Online dating services frequently have incidents of fraud, chargeback, and customer complaints.
- Travel services, including airlines, cruises, and vacation planners, are susceptible to fraud and also at risk of cancellation due to customer availability, weather, and illness.
- Businesses involved in eCommerce are particularly vulnerable to fraud. In fact, losses due to global eCommerce fraud in 2021 were approximately $20 billion. This presents a substantial risk to credit card companies.
- Subscription services result in chargeback and customer disputes because people often sign up for free trials and then forget to cancel the service before the first charge goes through.
- Gambling at times presents legal challenges and is sometimes associated with personal feelings of shame, both of which create risk for the payment processor.
- CBD, vape, and e-cigarette shops, like gambling, have problems with legality, particularly with regard to the age of the purchaser, as well as fraud.
While it may not always seem fair for a merchant to be assigned a high-risk classification based purely on the industry, the credit card company views this as a matter of self-protection and sustainability.
Reasons a Company is Placed on a High-Risk Merchant List
Although there are certain industries that are generally labeled as high-risk due to fraud and chargebacks, it is possible for any merchant to be categorized in this way. Payment processors evaluate a number of additional aspects of a merchant’s financial practices and history when determining whether a high-risk label is appropriate.
Merchants with a high transaction volume or high average transaction rate are frequently considered high-risk. More specifically, businesses that process over $20,000 a month in payments or who have average transactions of $500 often receive a high-risk classification.
Merchants who conduct business internationally and accept multiple currencies are seen as high-risk. Furthermore, merchants who accept payments from countries that are seen as vulnerable to fraud are viewed as especially high-risk. There are only a few countries that fall outside of this risk of fraud vulnerability and therefore don’t lead to a high-risk classification: the United States, Canada, Japan, Australia, and countries within Europe.
When a new merchant works with a payment processor for the first time, there is a limited or nonexistent record of processing transactions. In much the same way that it is difficult for an individual to get a credit card without an established credit history, it is a challenge for a merchant to get a low-risk categorization from a payment processor if there is not an existing transaction history.
Finally, if the merchant has a low credit score, this can also lead to a high-risk classification.
Many consumers and some businesses are not even aware that MCCs exist, let alone how they are assigned. Basic knowledge of the nature and use of MCCs is the foundation for understanding high-risk codes and why they are assigned.
The assignment of MCCs is one of many standardization practices developed by the International Organization for Standardization (ISO). The ISO is a nongovernmental organization that develops industrial and commercial standards.
In ISO 18425, merchant category codes are defined as “code values used to enable the classification of merchants into specific categories based on the type of business, trade or services supplied.” In other words, businesses are given codes that indicate what kinds of services or products they offer to customers.
However, these codes are not assigned by the ISO, and they are not necessarily universal. Instead, they are assigned by individual payment processors.
When a business starts accepting a particular credit card as a form of payment, the credit card company assigns a code to the merchant based on its goods and services. If a merchant offers multiple kinds of services, then it’s possible that the payment processor will assign multiple codes. MCCs are also sometimes updated, deleted, or added, so a business’s code may change over time. All MCCs are four digits, and they are used by credit card companies for a number of purposes.
- To track and restrict transactions
- To report necessary tax information to the IRS
- To compile information about purchasing patterns and spending habits of cardholders
- To determine whether buyers receive rewards points for a purchase
For example, if a credit card has a promotion in which customers receive 5% rewards for buying groceries, the company has to be able to track the customer’s purchases and determine which and how much of a transaction qualifies as a grocery purchase. When the customer uses their card, the MCC indicates whether it was for buying groceries or other items, like electronics, furniture, or jewelry. This allows the credit card company to issue rewards in the correct amount.
In general, MCCs are beneficial to customers and businesses, but some merchants are identified as high-risk. As a result, these businesses have to overcome unique challenges related to payment processing.
Effects of Being High-Risk
A business that finds itself on the high-risk merchant list isn’t facing a death sentence or an indication of failure, but there are definite challenges. Most commonly, merchants have to pay higher processing fees to make up for the risk that the payment processor takes by entering the partnership.
It’s important to note that every credit card company has its own system of determining whether a merchant is high-risk and implementing consequences for being labeled as such. However, nearly every payment processor institutes increased fees for high-risk merchants. In some cases, processing fees will be as much as double the cost of those for low-risk merchants.
There are other potential consequences of being assigned a high-risk MCC. High-risk merchants may be
- Charged higher chargeback fees
- Required to enter into longer contracts than low-risk merchants
- Asked to pay monthly or annual fees
- Charged an early termination fee
- Subjected to a rolling reserve in which the processor holds a percentage of the merchant’s Income until transactions can be verified
In each case, the merchant suffers not only an inconvenience but also significant financial consequences due to the high-risk classification.
High-Risk MCC Codes
It is important for every merchant to be aware of whether their business has been identified as high-risk. Unfortunately, some merchants are unaware of the categorization or how the high-risk classification affects their finances. The easiest way to determine how a merchant has been classified is by checking the MCC.
High-risk merchants are denoted by specific MCCs, but these are not always readily apparent to merchants. Business owners can determine their MCC by contacting the credit card brands directly. There are also merchant category code lookup services available to help determine how a company has been classified.
The assignment of MCCs is complex. It’s possible for a single business to be assigned multiple codes based on its structure and services. In other words, one part of the business may be categorized as high-risk while other parts are not. In addition, one card brand might label a merchant as high-risk while another identifies it as low-risk.
A merchant who feels that their business has been unfairly labeled as high-risk can request a new code. The card company will require evidence demonstrating why the original MCC was incorrect. However, recent history has shown that attempting to manipulate the MCC system is dangerous. In one case, the result was criminal charges of bank fraud.
In 2020, two men were arrested for bank fraud after tricking banks in the United States into processing more than $100 million in marijuana transactions. The two men disguised the transactions as dog toys, carbonated drinks, diving gear, and other products unrelated to cannabis. They also had people apply inaccurate MCCs to the marijuana transactions by using categories like stenographic services, music stores, and cosmetic stores.
While it may be tempting to try to find a way out of a high-risk MCC, this scenario makes clear that it is not worth the risk. Instead, it is better to employ the services of a company like Segpay, which can help merchants overcome the obstacles of a high-risk classification in a legal and financially sound manner.
MCC Code List
Although MCCs vary based on the payment processor, there are certain codes that are frequently used for this purpose. These are some of the categories that are considered high-risk on the MCC code list.
| Category | MCC |
| Specific airlines, air carriers | 3xxx |
| Passenger railways | 4112 |
| Taxis and limousines | 4121 |
| Bus lines | 4131 |
| Cruise lines | 4411 |
| Other airlines | 4511 |
| Travel agencies, tour operators, charters, travel packages | 4722 |
| Telecom sales and equipment, telecommunication devices | 4812 |
| Telecom services (telecommunication services) | 4814 |
| Computer network services (internet service providers) | 4816 |
| Wire transfers and money orders | 4829 |
| Precious stones and metals, watches, and jewelry | 5094 |
| Drugs, proprietaries, and sundries | 5122 |
| Motor home dealers | 5592 |
| Furniture stores | 5712 |
| Drug stores and pharmacies | 5912 |
| Pawn shops | 5933 |
| Direct marketing – insurance | 5960 |
| Direct marketing – travel (including discount clubs) | 5962 |
| Door-to-door sales | 5963 |
| Direct marketing – catalog (mail and telephone orders) | 5964 |
| Direct marketing – combination catalog and retail merchant | 5965 |
| Direct marketing – outbound (mail and telephone orders) | 5966 |
| Direct marketing – inbound | 5967 |
| Direct marketing – subscription (recurring subscriptions) | 5968 |
| Direct marketing – other (radio and TV sales) | 5969 |
| Stamp and coin stores | 5972 |
| Tobacco, cigarettes, vapes, e-cigarettes | 5993 |
| Miscellaneous specialty retail (including ammunition and firearms) | 5999 |
| Quasi-cash, currency, money orders, traveler’s checks, debt repayment, lease payment, loan payment, mortgage companies | 6051 |
| Securities dealers | 6211 |
| Account funding, stored value card purchase | 6540 |
| Timeshares (rentals, leases, and sales) | 7012 |
| Adult dating and escort (various dating services) | 7273 |
| Debt, marriage, personal counseling services | 7277 |
| Employment agencies | 7361 |
| Motor home rentals | 7519 |
| Video tape rental stores (adult content) | 7841 |
| Ticketing agencies (secondary ticketing) | 7922 |
| Video amusement game supplies | 7993 |
| Video games and arcades | 7994 |
| Betting and casino gambling (online casino, lottery, wagers) | 7995 |
| Membership clubs, health clubs, country clubs, sports clubs, private golf courses, boating clubs, swimming clubs | 7997 |
| Bail and bond payments | 9223 |
| Government services (state lottery) | 9399 |
Managing a High-Risk Classification
Receiving a high-risk MCC can be discouraging for merchants, but there are effective ways of managing the classification and preventing significant financial losses. Segpay offers solutions for merchants that have been marked as high-risk.
At Segpay, we offer high-risk payment processing that is tailored to each specific business. This includes ensuring that every transaction is successfully and securely completed. We can also protect merchants from payout freezes and service termination, both of which are common with traditional payment processors.
Segpay is the ideal solution to help merchants retain their current customers and also grow their businesses. Contact the Segpay team to learn more about the services we offer for high-risk merchants.
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Segpay is the ideal solution to help merchants retain their current customers and also grow their businesses. Contact the Segpay team to learn more about the services we offer for high-risk merchants.
