High-risk companies have many challenges ahead. Of course, if you’re reading this, it’s likely that you fall into this category and you want to learn more about how you can overcome these problems. One area that’s important to learn more about is high risk MCC codes.
These codes go a long way to deciding whether you have an easy or more challenging payment processing journey, often affecting fees and eligibility to specific services. In fact, in 2023 alone, high-risk industries lost around $117.47 billion due to chargebacks, with friendly fraud accounting for a large proportion. This is one of the biggest reasons for high-risk classification.
In this guide, we’ll talk in detail about high risk merchant category codes, what they mean, their associated issues, and everything else you need to know.
TL;DR
- MCC stands for Merchant Category Codes, which are four-digit numbers used to classify businesses by the type of goods or services they provide, playing a crucial role in risk assessment.
- High-risk MCCs often involve industries like gambling, adult entertainment, crypto, supplements, and travel, which face greater scrutiny due to regulatory, legal, or chargeback concerns.
- These codes impact payment processing access, often leading to higher fees, stricter underwriting, and potential denial of merchant accounts.
- Navigating high-risk payment processing requires partnerships with specialized processors, thorough compliance documentation, and risk mitigation strategies.
- Ongoing changes in regulations and evolving technologies may reshape how high-risk MCCs are classified and managed in the future.
- Businesses labeled as high-risk often deal with stigma and operational stress, which can affect both owners and employees psychologically.
The Fundamentals of MCC Codes and Risk Classification
Before we delve too deeply into high risk MCC codes, let’s first look at their basic structure and purpose. The table below explains the first element, which is the first digit of each code and how it associates with a specific industry.
| MCC First Digit | General Business Category |
| 0xxx | Agricultural Services |
| 1xxx | Airlines, Railroads, Transportation |
| 2xxx | Automotive Dealers and Services |
| 3xxx | Hotels, Motels, Lodging |
| 4xxx | Schools, Utilities, Government Services |
| 5xxx | Retail Stores, Clothing, Groceries |
| 6xxx | Financial Institutions, Services |
| 7xxx | Business, Repair, Personal Services |
| 8xxx | Healthcare, Education, Legal Services |
| 9xxx | Miscellaneous Services |
Origins and Purpose of MCC Classifications
The IRS originally created high risk merchant category codes in the 1980s, specifically for tax reporting purposes. However, major card networks such as Visa and Mastercard later started using these codes to classify businesses based on the goods and services they provide. These days, MCC codes are used for determining interchange fees, classifying transactions for tax, and offering credit card rewards.
One of the biggest issues for high-risk businesses is that the services they provide often bar them from acceptance by certain payment processors, or they’re forced to accept high fees. At PayCompass, we don’t believe your high-risk status should cause you as many headaches as it does. That’s why we’ve created specialised high-risk merchant accounts that cover many of the issues you face on a daily basis. At the end of the day, choosing the right high-risk merchant service provider is one huge step forward and away from constant issues.
The Taxonomy of MCC Structures
MCC codes follow a specific structure. We’ve explained that the first digit indicates the industry category, and the rest of the digits narrow the business type down further. This format helps financial institutions identify business types and their risk profiles quickly.
Evolution of MCC Classifications in the Digital Economy
As the world has become more digitized, MCC coding systems have had to adapt to new business models that weren’t around when the first system was created. At first, digital goods providers operated under miscellaneous retail codes, before dedicated codes were developed. Another classification challenge was continuity subscription merchants, as these often have varying risk profiles. Because of these issues, new classification processes have been developed or are under review, reflecting the dynamic world of high-risk businesses.
How Risk Assessment Shapes MCC Classifications
High risk MCC codes are often set following detailed risk assessments, identifying each business’ risk model.
Source: Pexels
One of the most significant aspects of MCC classification is risk assessment, and this helps to decide which category a business falls into. Risk assessment includes analysis of historical data patterns around high-risk transactions, industry trends, and regulatory requirements. All this helps determine the risk level for payment processors and banks.
Quantitative Risk Metrics in MCC Evaluation
High risk MCC codes are often set by using quantitative risk metrics, including average chargeback ratios, refund rates, average transaction sizes, and dispute frequency. These are all issues that high-risk businesses often face simply because of the nature of what they do. For instance, a travel agency will often have high-value transactions and a high risk of disputes because of weather-related cancellations. As a result, they will receive a high-risk MCC code, affecting what they can and can’t do in their payment processing activities.
In most cases, chargeback ratios over 1% tend to trigger high-risk labels. Our merchant accounts all have built-in chargeback prevention to help reduce these instances and make your business run more smoothly. Of course, alongside chargebacks comes disputes, and again, we make this easier with dispute management assistance.
Regulatory Influences on Risk Designation
Regulatory influences play a large role in high risk merchant category codes. Many high-risk industries are heavily regulated or operate within legal gray areas. All this just promotes classification. In this case, cross-border regulatory inconsistencies also come into play.
The Reputational Factor in Risk Assessment
While some may deem it unfair, there is also a reputation element to consider. Certain businesses are deemed high-risk simply because what they sell or provide is considered morally gray, for instance, adult entertainment services. From that, card networks and banks may choose to add a high-risk classification simply to protect their brand image, even when technical risk factors may not support their decision.
Specific High-Risk MCC Categories and Their Challenges
We’ve talked about what high risk MCC codes are and how they’re decided upon, but now let’s talk about the challenges that go alongside them.
Adult-Oriented and Vice Industries
Businesses within the adult entertainment industry, along with gambling, and other businesses in the vice category are deemed high-risk. As a result, they face payment processing challenges, complex regulatory oversight, and high chargeback rates. These are also PayPal restricted businesses, along with other processors such as Stripe. All this makes running a business that much harder.
The table below outlines the high risk MCC codes associated with these businesses:
| High-Risk MCC | Industry Category | Visa Risk Tier | Primary Risk Factors | Typical Processing Premium |
| 5967 | Adult Content | Tier 1 | Chargebacks, Brand Risk | 3-5% above standard |
| 7273 | Dating/Escort | Tier 1 | Fulfillment Verification, Brand Risk | 4-6% above standard |
| 7995 | Gambling/Betting | Tier 1 | Regulatory Complexity, Chargebacks | 3-4% above standard |
| 6051 | Cryptocurrency | Tier 2 | Regulatory Uncertainty, Volatility | 2-4% above standard |
| 5816 | Games of Skill | Tier 2 | Regulatory Classification, Chargebacks | 2-3% above standard |
| 5966 | Telemarketing | Tier 3 | Consumer Protection, Fraud Potential | 2-4% above standard |
Adult Content and Services (MCC 5967, 7273)
Adult entertainment businesses face many challenges, including high chargeback rates. Friendly fraud is another issue here, which is where legitimate purchasers deny a transaction, leading to disputes and further issues. Of course, such businesses are also subject to regular regulatory changes that vary across jurisdictions, and all of this contributes toward restrictive payment processing policies.
Gambling and Gaming (MCC 7995)
The gambling and gaming industry is large and extremely popular, consisting of online casinos, gaming sites, and sports betting platforms. These are all included under the MCC 7995 code and this is mostly because of the complex regulations these businesses face from state to state and country to country.
In addition, there are complicated licensing requirements to follow, along with the need for geolocation technologies to manage high transaction volumes and the increased risk of fraud.
Financial Services and Investment-Related MCCs
There are many financial services that are considered high-risk, and, again, this comes down to regulatory scrutiny. However, there is an increased risk of money laundering and customer protection concerns.
Money Services and Currency Exchange (MCC 6050, 6051)
Services such as currency exchanges, remittance services, and money transmitters all fall under the MCC 6050 or 6051 codes. These are highly regulated and must follow intensive KYC (Know Your Customer) protocols, transaction monitoring, and are subject to different requirements across several jurisdictions.
It’s vital for these types of businesses to maintain transaction monitoring systems that can quickly identify transaction structures. SAR (Suspicious Activity Report) filing is also a crucial piece of the puzzle, with obligations that can significantly increase overheads. All this makes such businesses high risk in the eyes of payment processors.
Investment Opportunities and Financial Advice (MCC 6211, 6760)
Investment-related businesses also fall into this high-risk category, mostly due to the potential for fraud, but also because of strict regulatory oversight. This category includes financial advisors, investment platforms, and securities brokers to name a few, and they must follow SEC regulations and consumer protection laws to the letter. Of course, they also face payment processing challenges.
Additionally, investment platforms must have robust disclosure verification systems that document that customers acknowledge the risks associated with these services. All of this has to be done prior to transaction completion. There are also significant challenges in systems tracking customer activity across several investment types and accounts.
Cryptocurrency and Digital Asset Services (MCC 6051)
Another type of business with high risk MCC codes is digital currencies. Cryptocurrency exchanges and any associated services are one of the newest types of categories but they’re extremely volatile and have strong regulatory oversight as a result.
Most cryptocurrency businesses utilize blockchain analytics to help spot any high-risk wallet addresses or patterns. However, compliance requires careful tracking and transmitting originator and beneficiary information if transactions are over a certain amount.
The Future of High-Risk MCC Classification and Compliance
Now we know about the different high risk merchant category codes, we can delve further into emerging trends, helping you to prepare for the future.
Regulatory Trends Impacting High-Risk Classifications
All businesses regardless of high risk MCC codes must follow detailed regulations specific to their industry.
Source: Pexels
Regulations change regularly in line with new threats and emerging issues, and these are often slightly different across jurisdictions. All this shapes how high-risk merchants operate and how they can manage payment processing relationships.
Of course, the first step is to stay up-to-date with regulatory changes or any changes that may be on the horizon. This gives you time to take proactive measures and remain in compliance. The good news is that there are moves to achieve cross-border regulatory harmonization in many cases, which may create more stringent regulations, but at least they’ll be the same across the board.
The Impact of CFPB and FTC Enforcement Actions
The Consumer Financial Protection Bureau (CFPB) and Federal Trade Commission (FTC) have taken recent action to target payment processors that work with high-risk merchants. This has created a new expectation – “know-your-customer’s-customer.” This means a higher degree of diligence on merchant business practices and not just how financially secure they are.
Within this, there is an increased need for documentation, including marketing materials, customer service policies, and fulfillment procedures that go beyond regular underwriting.
Technological Innovations in Risk Assessment
One business element you have a significant amount of control over is inventory optimization, and this goes a long way to boosting your chances of survival. Having an excess inventory ties up your capital and means you have higher carrying costs. However, insufficient inventory leads to customers going elsewhere and lost sales.
This means you need to find the sweet spot, especially considering that inventory carrying costs represent about 20% to 30% of annual inventory value.
A few strategies include predictive analytics for demand forecasting, a just-in-time inventory system, and flexible relationships with your vendors.
Service Business Longevity Factors
As technology advances, payment processors use many new means to help assess the risk profile of a specific business. Of course, this has its pros and cons, creating both challenges and opportunities for businesses with high risk MCC codes. However, by understanding these technological advancements, you can prepare for any changes ahead.
AI and Machine Learning in Merchant Risk Profiling
To help assess the risk level of an individual business, many payment processors are increasingly turning to technologies such as AI and machine learning. These are both highly sophisticated and have many uses across the payment processing world. Not only that, but machine learning in particular has the ability to learn over time, meaning it’s always up-to-date with new threats and information.
Both systems can analyze large amounts of information extremely quickly and with a high level of accuracy. This includes customer behavior, transaction patterns, and external data sources, allowing processors to create accurate risk profiles.
Blockchain and Decentralized Finance Alternatives
Blockchain is another major player and systems based on this technology and decentralized finance (DeFi) offer potential for high-risk merchants who regularly face challenges when it comes down to accessing solid payment processing options. Blockchain could help with reducing fees and chargebacks over time, simply because transactions are irreversible. Smart contracts can also be used to automate escrow functions based on predefined conditions.
The Psychological Impact of High-Risk MCC Designations
When a business owner learns that their business has received a high risk merchant category code, it can affect them in ways beyond their actual business processes. The psychological effects are over overlooked, but having to deal with challenges at seemingly every turn is highly demanding and stressful over time. For this reason, it’s important to develop stress management measures and manage any industry stigma to build overall resilience.
Identity Management for Stigmatized Industries
Many businesses with high risk MCC codes sometimes struggle with an industry-related stigma and it can often go far beyond payment processing challenges. In some cases it can affect business relationships, public perception, and marketing opportunities. While difficult to deal with, it’s key to develop effective strategies to manage this overall perception and focus on growth strategies.
Narrative Reframing for Legitimacy
One way to change the stigma around a particular business type is to create your own narrative that helps to reframe how the public perceives your business. It’s too easy to simply accept industry stereotypes, but instead it’s key to focus on areas of legitimacy, such as personal associations, educational components, and compliance certifications.
Community Building Among High-Risk Peers
Many high-risk merchants find that there is strength in numbers, forming communities to share knowledge and provide emotional support. This is a very useful strategy for many reasons but it helps to provide insights into regulatory changes and any effective risk management strategies that conventional channels may not mention.
Psychological Resilience Through Financial Architecture
Building strong financial structures that are designed to handle disruption is one way to reduce stress and psychological pressure around high risk MCC codes. From this, it’s easier to operate with confidence, knowing that you have everything in place to deal with issues if/when they arise.
Cash Flow Contingency Planning
Many high-risk business owners develop a strong cash flow contingency plan that can handle any sudden increase in reserve needs by payment processors, increased chargebacks, or suspensions. Having this in place helps reduce anxiety and boosts decision-making.
However, it’s always best to have the right payment processing system in place from the start. PayCompass’ accounts are designed for these issues, and it’s an ideal PayPal alternative which often freezes or even blocks accounts associated with high-risk transactions.
Banking Relationship Diversification
Many high-risk business owners understand the importance of not “putting your eggs all in one basket,” which means diversifying your banking relationships and not just sticking with one. This isn’t just to avoid problems however, as it can also help you to maintain lending relationships across several institutions should the need arise.
Industry-Specific MCC Challenges and Solutions
All industries have specific challenges to face, and many of these arise due to MCC classifications. Let’s look at some of these nuances and understand how they can be managed.
Emerging Technology Sectors and MCC Ambiguity
Some of the most innovative businesses sit in a space where MCC classifications haven’t yet caught up. One is subscription-based businesses, creating a range of challenges for payment processors to understand. It’s vital that these businesses learn how to navigate ambiguity where classification is concerned, yet still prove their legitimacy.
SaaS and Digital Subscription Challenges
SaaS businesses (Software-as-a-Service) are regularly designated as high-risks, facing challenges due to recurring billing, international customer bases, and their form of product delivery. Our dedicated SaaS merchant account is one way around this, designed to recognize and appreciate the challenge this type of business faces.
Telehealth and Remote Healthcare Services
Telehealth businesses also have unique challenges in terms of MCC classification, mainly because they have to work within a large range of regulations. This includes HIPAA, insurance billing integration, prescription-related rules, and cross-state licensing. All this can make securing and managing payment processing very challenging.
Again, a dedicated merchant account is a good choice here, while also having a deep understanding of HIPAA-compliance credit card processing. The more information, the better when it comes to ensuring compliance.
Travel and Hospitality Industry Processing Challenges
The travel industry has its own range of challenges, and this is perhaps one of the industries that has the most complex of them all. With a high risk of fraud and chargebacks, the travel industry also has to deal with multi-currency payments, high-value transactions, and disputes due to cancellations, often due to weather or other reasons out of their control.
Our travel agency merchant account services allow travel businesses to operate their businesses without undue stress or concerns. We also understand the importance of accommodating multi-currency payments.
The travel industry receives high risk MCC codes due to high-value transactions and increased chance of fraud.
Source: pixabay.com
Managing Fulfillment Risk in Travel Services
All businesses within the travel industry often deal with bookings that incur payment a considerable amount of time before the service is delivered, e.g., a customer will pay for a cruise months before they’re due to depart. This creates a large amount of risk from the start, and it’s vital to have processes in place to mitigate this as far as possible. Staged payment plans are one option, with carefully documented delivery milestones. It’s also important to verify traveler details extremely carefully, and be consistent with communication every step of the way.
Seasonal Volume Management Strategies
Travel is also inherently seasonal. While planes certainly take off all year-around, most people head off on vacation during the warmer months. This creates a seasonal cycle for travel businesses that can trigger risk-based monitoring systems.
Seasonal planning is key here, communicating with processors before volume increases and presenting historical data to demonstrate consistent patterns across several years. It’s also vital to have alternative payment options that help relieve processing pressure during peak periods.
Nutraceutical and Wellness Product Processing
Payment processing for CBD and other businesses in the nutraceutical and wellness niche can be challenging to say the least. Again, this is down to regulatory uncertainty across jurisdictions, claims scrutiny, and verification issues around fulfillment. Nutraceutical merchant accounts are one option here, helping to streamline challenges into one easy-to-manage situation. However, there is still a need to handle product claims and categorization.
Navigating Claim Substantiation Requirements
Marketing campaigns need to be carefully designed to deal with any issues that may arise connected to payment processing. This means having strong review processes in place for product claims, and keeping detailed files to back all of this up. It’s key to separate informational content from direct product claims, while developing customer testimonial products that are compliant and fact-driven.
Product Categorization Strategies
Wellness product businesses with high risk MCC codes usually face product categorization challenges. It’s vital to clearly differentiate between different types of products, such as cosmetics, supplements, and food. It’s also important to have separate merchant accounts for specific categories, and accurate taxonomy systems for all products.
Learning Recap
Throughout this guide to high risk MCC codes, it’s obvious that high-risk businesses face a range of challenges completely unique to businesses operating in the low-risk space. These go a long way to influencing how businesses operate, influencing their options in terms of payment processing, operational costs, and how stable their businesses are overall.
There are several ways to help in this situation, with many new and emerging technologies offering promise in terms of risk detection in particular. As many high-risk businesses face high risk of fraud and chargebacks, having the tools to analyze and potentially spot issues before they happen is key in the fight against these practices. However, dedicated merchant accounts are also a critical element here.
At PayCompass, our specialized merchant accounts are designed to deal with the issues specific to each individual high-risk business. We’re experts in exactly what you’re going through, and that’s why we’ve designed our accounts to handle these unique issues. Whether you’re a small business or you’ve grown far faster than you imagined, our payment processing services can help you overcome problems that may prove to be a barrier to your further growth.
To find out more, simply contact us and one of our experts will be in touch to help you get started.
