Washington Restaurant Market Watch: Beware of credit card miscoding

Washington Restaurant Market Watch: Beware of credit card miscoding

By Paul Schlienz

A word to wise restaurateurs: Keep a close eye on your merchant category codes.

In the credit card processing world, merchants are categorized according to a merchant category code (MCC). This code helps determine interchange fees, or the amount merchants are required to pay to card-issuing banks for each credit card transaction.

Recently, there have been reports of deliberate instances of miscoding of businesses, including restaurants, which should be coded as MCC-5812, as bars (MCC-5813) in order for a payment processor to offer restaurants lower fees since bars generally have lower interchange fees.

The one digit, in a MCC, that differentiates a restaurant from a bar is no joke. It may not look like much, but it can potentially mean a big hit to you financially.

Here’s an example of miscoding: A customer uses a Visa Rewards Card at a restaurant. The interchange fee that should be applied is 1.95% (.0195) + 10¢. Thanks to miscoding on the part of the payment processor of that restaurant as a bar, the interchange fee is 1.65% (.0165) + 10¢.

While the difference of .003 basis points sounds fairly irrelevant, a higher ticket restaurant that does significant volume can short the system $25-$75+ on transactions per month on that one Visa card type.

If this kind of miscoding is uncovered during an audit, there would be fines between $1,000 and $10,000 per transaction. While it is more likely that a payment processor would incur these fines, it is also possible that restaurant operators who use a processor that deliberately miscodes could be liable.

So, what do you, as a restaurant operator, do if you think your transactions have been miscoded?

“If a restaurant or hotel believes its MCCs are miscoded, the restaurant should immediately contact its payment processor and request a correction in writing,” wrote Sandip Soli, attorney with Cairncross & Hempelman and a member of the Washington Restaurant Association’s Advisory Network, in an analysis of this issue.

Keep in mind that your agreement with your payment processor may contain deadlines within which you must report such errors. If there are such deadlines, follow them to the letter.

Don’t let one digit leave you liable.