It’s no surprise that there are various types of businesses. However, you might not know that there’s a formal classification system for businesses that can impact their credit card processing.
Businesses are mapped to their respective industries through an Standard Industrial Classification Code (SIC) and Merchant Category Code (MCC). SIC codes are managed by the U.S. Department of Commerce and used by the IRS and processing banks, while MCC codes are issued by the credit card brands (Visa, MasterCard, Discover and Amex). While these four-digit numbers sometimes overlap and sometimes differ, they both categorize a business by its industry.
You might be wondering how your business classification gets processed during a transaction. When a customer makes a purchase, information is transmitted regarding the account balance, the transaction amount, and your MCC and SIC codes. The issuing bank (the bank that issued the customer’s credit card) or the acquiring bank (the Merchant Account Provider’s backing bank) can accept or reject the transaction based on this information. This is also when the Interchange associated with the transaction is assessed.
Here’s how this can impact your bottom line.
Each card brand has an Interchange guide that is updated on a biannual basis. These guides list the Interchange, or wholesale cost, of a given transaction type along with other rules and regulations. Interchange varies based on the risk and reward associated with the transaction, with higher risk and reward incurring a higher Interchange fee.
Here are Visa, MasterCard, Discover and Amex’s Interchange guides for easy reference. Discover does not publish its current rates in its Interchange guide.
So how do MCC and SIC codes relate to Interchange? At any given time, the card brands may offer discounted Interchange rates to certain industries. For instance, Visa’s current Interchange guide lists CPS/Utility as receiving a flat Interchange of $0.75. Supermarkets, gas stations and hotels all receive special pricing. This makes credit card acceptance cheaper for those businesses and incentivizes them to start accepting credit cards or to increase their credit card volume.
Of course, if your industry is currently receiving an Interchange discount, you should ensure your business is correctly classified (more on that later).
Credit cards with usage restrictions, like HSA health credit cards and business cards, can’t operate without a classification system. An HSA card would likely be rejected at a movie theater because the movie theater’s MCC and SIC codes don’t line up with the permitted codes established by the issuing bank.
This is helpful to know at checkout when credit card rejects occur. Sometimes you’ll receive a 62 restricted card decline code when a credit card is rejected because of your MCC code. We say “sometimes” because issuing banks can provide a vaguer error code of 05, which is an unspecified response.
However, it’s helpful to know that an 05 error code could be the result of a 62 restricted card decline. You could ask the customer whether the card is restricted. There’s a chance the customer unknowingly used an improper card for the purchase. At the least, being able to troubleshoot the issue can help alleviate awkwardness at checkout when a declined transaction occurs.
Now that you know how your MCC and SIC codes can affect your credit card processing, it goes without saying that being classified correctly is critical. Your business could be incorrectly classified or have a general SIC code of 7299. Many issuing banks won’t allow transactions at businesses with this generic code due to a lack of insight into your business. This could negatively impact your credit card sales if numerous customers are unable to pay at checkout.
Likewise, you’ll want to take advantage of Interchange discounts should your industry be granted one. Allowing your customers to pay with their preferred payment method is an easy and effective way to alleviate friction at checkout and encourage repeat business. Make sure you partner with a provider that properly sets up your account to avoid issues associated with your MCC and SIC code designations.
Have you dealt with error codes due to card restrictions or your business being improperly classified? Tell us about it below!