The use of cash to make payments was something which was already in decline on a global basis before the COVID-19 pandemic forced businesses to change the way they operate.
According to McKinsey, global cash transactions dropped from 89% of all transactions, to 77% in the five years leading up to 2018. While, over the five years between 2012 and 2017, the use of credit and debit cards as a payment method, almost doubled – rising from 5% to 9%.
The business data platform, Statista, predicts that the transaction value of global digital payments is set to grow by 12% annually between 2021 and 2025, resulting in a total of $10,520,219m.
COVID-19 then quickly brought about a dramatic increase in the use of card payments, as lockdown measures had a measurable impact on consumer behaviour. In the UK, for example, card payments rose by 75.3% between 1st and 17th April and 74.8% from 18th April to 17th May. At the same time, ATM transactions dropped by 39.9% and 33.31% respectively. As with the global picture, this was a trend which had been developing for several years, with card payments rising by 20.6% in the year leading up to 31st March 2020 and ATM transactions falling by 4.1%.
These shifts, and the firmly entrenched consumer behaviour, mean that any business which wants to carry on connecting with customers and provide a service which meets their needs, is going to have to offer the fullest possible range of payment options. In doing so, they will also have to understand all aspects of dealing with card payments.
One of the aspects which need to be understood is the Merchant Category Code (MCC). The Merchant Category Code is a four-digit number assigned by credit card companies when a business begins to take payments using a card machine. It is set on the type of market in which the merchant in question operates. Some examples include the following:
- MCC 4722 Travel agencies and tour operators
- MCC 4812 Telecom equipment and sales
- MCC 4816 Computer network services
- MCC 4829 Money Orders – Wire Transfer
- MCC 4899 Cable and other pay television (previously Cable Services)
- MCC 4900 Electric, Gas, Sanitary and Water Utilities
- MCC 5013 Motor vehicle supplies and new parts
- MCC 5021 Office and Commercial Furniture
A full list of the MCCs, currently in use, runs to over 30 pages and includes categories as varied as chiropractors, cigar stands and snowmobile dealers. In a sector such as hospitality, individual MCCs often apply to specific hotel groups, with MCC 3501 applying to Holiday Inns, for example.
Since 2004 the assigning of an MCC has been required by the IRS in the United States, and card schemes such as Visa, Mastercard and American Express were given the responsibility for creating a comprehensive list of relevant codes.
Prior to this, a system of Standard Industrial Classification Codes (SIC) was in use, but these were not designed to differentiate between the different sectors within any individual industry. Since then, the number of MCCs has grown in response to the rise of new industries and to take into account some businesses, such as airlines, became so large that they need a unique MCC in order to manage their payments with maximum efficiency.
How MCCs are used
MCCs play a role in all stages of a transaction. Initially, they are used by card payment networks in- order-to ascertain which industry a particular merchant works in. This is important because it impacts on the interchange fee to be paid by the merchant. With some codes, such as those linked to businesses with lower chargeback rates or to charities, the fees charged by the card companies may be less than those charged to other industries.
In addition to this, the MCC will be used by issuers to determine what kind of transaction is being processed. This information will then be used to calculate the risk involved in the transaction and therefore whether it should be approved or declined.
Some credit cards enable consumers to accumulate points or rewards when purchasing specific goods or services. MCCs are used to determine whether a transaction earns rewards of this kind of not.
There are several reasons why merchants should ensure that their transactions are taking place under the correct MCC for their business.
The first of these is that failing to do so may result in fines being levied by the relevant card schemes.
The second is that the wrong MCC could lead to a merchant having to pay higher fees on transactions than they really have to, and MCCs also have a role to play in dispute resolution and reducing the incidence of chargebacks.
The MCC provides another reference point for a consumer who might be having problems identifying the source of a transaction and could stop them labelling an otherwise unidentifiable transaction as fraudulent.
In the United States the MCC can play another vital role in as much as it can identify whether the payment in question needs to be reported to the IRS.
Looking to the future, it seems likely that the number and range of MCCs will increase further as relatively new industries, such as cloud computing services, grow to such a size that they can no longer be classified under an umbrella term like ‘Computer Programming, Data Processing and Integrated System Design Services’ (currently MCC 7372). The same could apply to newly emerging sectors such as crypto-currency exchanges or self-driving car provision.
As far as individual merchants are concerned, any diversification in the goods and services they provide may lead to a shift in the MCC under which they operate, or else to them operating under the wrong MCC. A business which begins life selling toys under the MCC 5945 may also stock a few items of confectionary. Over time, they may find that the confectionary is a more profitable product than the toy, and so switch fully from toys to confectionary, which has a MCC 5441 of (candy, nut and confectionery stores).
You can trust NOIRE
Working with a payment partner like NOIRE will ensure that the MCC applying to your transactions is always correct, based on shifts in your own business and in the wider assignation of MCCs. We’ve written before about the many challenging aspects of card payment schemes, and this is just one more that we can deal with so that you don’t have to. Like Payment Processing and fraud risk and management, you can leave it in our capable hands.
If you need a helping hand, get in touch with us today – we would be very happy to help you.