Demystifying Merchant Categorization

The question isn’t which merchant categorization scheme is best; it’s which one to use for the task at hand.

Merchant categories are at the center of a variety of considerations for both issuers and merchants. And classifying merchants into categories is a more complex problem than it seems. There are some obvious philosophical issues (What kinds of travel make a “travel” merchant? How fast does the food need to be for “fast food”?), but the important questions for advertising technology relate to the more technical side. Companies in the rewards space categorize merchants in two primary ways: merchant category codes (MCCs), alongside separate in-house categories.

In the context of rewards, MCCs are used most often by merchants. For example, larger brands launching a card-linked offer (CLO) tend to have multiple business units, sometimes with different merchant categories. The archetypal brand with this use case might be a convenience store and gas station chain with one point-of-sale for fuel purchases and another for in-store purchases. These differences are captured using standardized categories created by major payment processors. 

For issuers, a different problem presents itself. Financial institutions often want their user experiences to include a way to filter and search by available merchant offers by generalized merchant categories. The solution to this is a broader, in-house categorization system created by the issuer or their rewards provider.

So, in-house merchant categorization is more useful for developers and banks working on building user interfaces, and for cardholders navigating their cashback programs. On the other hand, MCCs are generally more useful for merchants looking to reward consumers on specific purchase criteria to ensure transactions are correctly evaluated and matched.

Merchant Category Codes (MCCs) Drive More Powerful Rewards

Imagine that you’re a media buyer or advertiser for a department store with an on-site pharmacy. You want to run an offer on general department store purchases. For a variety of reasons, you can’t offer cash back on pharmacy purchases. But the basic information for transactions from the pharmacy and the department store business units is practically identical. Rewards matching algorithms (which power cashback platforms like Kard’s) can have trouble parsing these transactions and correctly identifying valid rewards. 

Luckily, credit card processors already have a standardized way of differentiating between these types of purchases in a more precise manner. Each card processor has a slightly unique set of four-digit codes for these categories, which are referred to as MCCs. They’re used for a variety of purposes, like risk management, business reimbursement, and convenience fee assessment. And we use them to differentiate between rewardable and non-rewardable purchases at Kard. 

In addition to the department store example, gas stations have a common use case for MCCs. The average consumer thinks of gas station and convenience store combos as being the same business. But the reality for these businesses is that their fuel units and their in-store units have very different models, and they’re sometimes not even owned by the same umbrella brand. These conditions make for a tricky cashback scenario — what if only the gas station business wants to offer rewards? That’s where the merchant category code comes into play. Kard’s transaction matching algorithm can differentiate between transactions based on MCC, which allows for rewards to be distributed based on the merchant’s exact needs, regardless of the complications brought on by different business units.

A selection of Mastercard's MCC codes, taken from their merchant quick reference guide

In-House Categorization Is Used to Build Better User Experiences

Although achieving a high level of precision, the MCC system has a minor problem when it comes to curating user experiences. It isn't very human-readable. Some individual airlines have their own MCC, while other entire industries sit in a single shared MCC. Each major payment processor also has its own set of MCCs. And on top of it all, there are so many MCCs that it can be difficult to separate them all into easily-understandable categories. For both developers designing these rewards programs and for cardholders enrolled in these programs, an in-house categorization system provides a lightweight solution to this problem.

Kard’s in-house merchant categorization system is detailed in our API. At press time, we separate merchants into 17 broad categories:

Arts & Entertainment
Baby, Kids & Toys
Books & Digital Media
Clothing, Shoes & Accessories
Computers, Electronics & Software
Department Stores
Food & Beverage
Health & Beauty
Home & Garden
Occasions & Gifts
Sports & Outdoors
Supplies & Services

When we add a new merchant offer to the platform, our team marks it as belonging to one of these categories. Issuers using Kard’s rewards API can then use the category variable to perform a variety of tasks. User-enabled filtering allows users to see only gas station offers near them, for example. Another use case is rewards program reporting; are users redeeming rewards from specific categories more often than others?

In-house merchant categorization systems will look different from, well, house to house. The important thing is that they’re useful to the organizations that rely on them.

Both Categorization Schemes are Useful

At the end of the day, the question isn’t which merchant categorization scheme is best; it’s which one to use for the task at hand. MCCs are powerful because they enable merchants to run more flexible campaigns, allowing them to define purchase criteria to reward on more clearly. And the in-house categorizations, likely different from bank to bank and rewards platform to rewards platform, serve a perfectly useful set of purposes when it comes to optimizing UI, UX, and reporting.

Looking to run an offer on the Kard network as a merchant, or join us as an issuer and launch your own rewards program? Reach out and we’ll get in touch to get you started!