What is MCC and Miscoding?
A Merchant Category Code (MCC) is a four-digit number listed in ISO 18245 for retail financial services. A MCC is used to categorize a business by the kinds of goods or services it offers.
An MCC indicates the primary category in which a merchant does business and may be used:
- to ascertain the interchange fee paid by the merchant, as high-risk merchants pay higher processing fees rather than a low-risk merchant.
- by credit card companies to extend reward points or cash back, for paying in specific classifications.
- by card networks to identify rules and restrictions for card transactions (for example, Automated Fuel Dispensers (MCC 5542) have certain rules for approval and clearing messages).
- for tax purposes, e.g., in the United States, to decide whether a payment is mainly for “services”, which requires to be reported by the client to the Internal Revenue Service for determining the tax, or for “merchandise”, which does not.
Few Examples of MCC of ISO 18245
Although code has been defined, merchants pass the transaction of different categories through the MID, legally being operated. This activity is defined as miscoding. For example, Merchants from the gaming industry pass their gambling traffic through gaming MID.
Visa has discovered that some merchants are selling the product/services into those countries where local laws ban such transactions or have stringent rules in licensing by the appropriate financial services authority.
Visa strongly urges acquirers to follow a strong review process on this issue. To continue integrity of the payment system, with effective from 1 December 2018, Visa will require acquirers to code the below mentioned unregulated or unlicensed merchant categories for gambling under Merchant Category Code (MCC) 7995— Betting, like Lottery Tickets, Casino Gaming Chips or Off-Track Betting:
• Binary options and same kind of products
• Rolling spot forex transaction
• Commercial spread betting
• Contracts for difference
As per Visa MCC 7995 is classified as high-brand risk and expects the acquiring bank to be recorded as a high-brand risk acquirer. Merchants who are compliant with the Visa Rules and conduct regulated and licensed trading platforms may go on to transact under MCC 6211—Security Brokers / Dealers.
Merchants coded under MCC 6211 should:
• Be acquired in a market which involves licensing or regulates merchant trading platforms
• Be licensed by the applicable financial services authority in the country or countries where their business is performed
• Comply with relevant legal obligations, as well as those related to complicated speculative financial products
Acquirers must conduct an immediate review to reduce the risk of any merchants recommending binary options, rolling spot forex trading, business spread betting and contracts for different products to make sure that they are complying with the laws of the countries where they do business. Acquirers are stimulated to investigate binary options, rolling spot forex trading, financial spread betting and contracts for all merchants that perform a disproportionate volume of cross-border transactions and instantly terminate any sales into marketplaces where such transactions are banned.
For further reading, check out our article The Adventurous World of International Merchant Accounts!