We decided to provide our insights into the power of strictly MCC-based categorization and its limits. Categorization is important for credit risk scoring and it is the basis for Personal Finance Management tools.
When we analyzed our categorization with MCCs, we saw that only 53% of transactions could be easily and reliably categorized based on their MCC code. Let’s have a look at the most frequent problems we identified that make MCC usage more difficult than it may seem at the first glance.
MCC codes are important for credit risk scoring and personal finance management (PFM) tools, but they are not the only factor to consider when categorizing expenses. MCC categorization can be limited because it does not take into account the nuances of individual spending habits. For example, two people could have the same MCC code for their coffee shop purchases, but one could be buying coffee beans while the other is buying coffee drinks. PFM tools that take into account MCC codes as well as other factors, such as merchant names and transaction amounts, can provide a more accurate picture of spending habits. In addition, MCC codes can change over time, so it is important to periodically review categories to ensure that they are still accurate.
|5812||Eating Places and Restaurants|
|5814||Quick Payment Service-Fast Food Restaurants|
|7278||Buying and Shopping Services and Clubs|
|5541||Service Stations (with or without Ancillary Services)|
|5499||Miscellaneous Food Stores-Convenience Stores and Specialty Markets|
|5811||Caterers – Prepare & Delivery|
The Merchant Category Code (MCC) is the four-digit code listed in ISO 18245. They are used to classify businesses by the types of goods or services they provide. Payment processors use MCCs to categorize transactions for reporting, billing, and other purposes.
While MCC codes can be a helpful way to categorize transactions, they are not always accurate. In our analysis, we found that only 53% of transactions could be easily and reliably categorized based on their MCC code. This means that there is room for improvement when it comes to MCC categorization.
One way to improve the categorization is to use supplemental data sources. For example, if a transaction has a code that does not accurately reflect the type of goods or services purchased, using data from the merchant’s website or other sources can help to more accurately classify the transaction.
Another way to improve MCC categorization is to use machine learning algorithms. These algorithms can learn from historical data to better predict the appropriate MCC code for new transactions. By using these methods, payment processors can improve the accuracy of MCC categorization and provide more helpful reports and insights for their clients.
MCCs are important for credit risk scoring and categorization accuracy is essential for Personal Finance Management (PFM) tools. This is why PFMs are finding their way into banking applications and are becoming a banking standard. MCCs provide a way to quickly and accurately categorize transactions, but they have their limits. MCCs are only effective if the merchant has assigned the correct code to their businesses. If not, the categorization will be inaccurate. In addition, MCCs do not account for transactions that are processed manually, such as over-the-phone or in-person payments
For these types of transactions, another method of categorization must be used. Despite these limitations, MCCs remain the most popular and effective method of transaction categorization. Read more about how the MCC codes could be improved in our PDF report!