The payment landscape for collection businesses is evolving with Visa’s recent implementation of a new Merchant Category Code (MCC) for debt collection. In recent months, Visa has introduced significant rule updates, including the new MCC for collection agencies and revisions to debt repayment rules. These changes aim to support new merchant segments, offer more transparency to cardholders, and protect issuers from excessive credit risk. Collection businesses should pay close attention to these updates to avoid potential penalties, remain compliant with Visa’s rules, and maintain a positive reputation within the payment ecosystem. In this article, we will explore the new MCC rules, potential consequences of using incorrect MCCs, and the steps collection businesses can take to ensure compliance.

Background on MCCs

MCC codes are essential for businesses that engage in payment processing. These standardized codes classify businesses based on the products and services they offer, providing financial institutions with valuable insights for risk assessment and compliance. American Express was the first to assign a specific MCC (7322) for debt collection, leading to some businesses dropping it as a payment option entirely. On the other hand, Visa previously employed a broader definition when classifying debt-related transactions. Collection businesses must be diligent in accurately representing their nature of business through the correct MCC code. Failure to do so can lead to severe consequences, including penalties, regulatory scrutiny, and reputational damage.

New MCC Rules for Collection Agencies

Visa introduced MCC 7322—Collection Agencies in October 2022 to categorize collection businesses accurately. Collection agencies are now required to use this new MCC for processing payments related to the collection of overdue receivables. The MCC 7322 became available in VisaNet with the October 2022 VisaNet Business Enhancements release, and its use was made mandatory for collection agencies effective from April 15, 2023. Visa defines collection agencies as merchants that collect payments of overdue receivables under contract or collect overdue receivables purchased from a third party.

Potential Consequences and Penalties of Using Incorrect MCCs

Misrepresenting a collections business’s nature by using a false or inaccurate MCC code can lead to serious consequences and penalties for collection businesses, such as:

• Violation of Visa Rules: Misuse of the MCC code is considered a violation of Visa’s rules and regulations, potentially resulting in penalties and enforcement actions.
• Account Termination: Payment processors and acquiring banks may terminate a collection agency’s account if they discover misuse of the MCC code, disrupting payment processing capabilities.
• Fines and Penalties: Visa and other payment networks can impose substantial fines and penalties on businesses found to be using incorrect or misleading MCC codes.
• Loss of Customer Trust: Misrepresenting the nature of the business can erode customer trust, leading to a loss of clients and revenue.
• Regulatory Non-Compliance: Incorrect MCC code usage may lead to non-compliance with industry regulations, inviting further penalties and legal consequences.
• Reputational Damage: Misusing the MCC code could tarnish the agency’s reputation, making it difficult to attract new clients and partners.
• Legal Action: In some cases, using the wrong MCC code might lead to legal action, especially if it is found to be intentional or fraudulent.

Ensuring Compliance and Mitigating Risks

To avoid penalties and pitfalls associated with incorrect MCC codes, collection businesses should take the following steps:

• Accurate MCC Classification: Collection agencies must diligently assess their business activities and use the appropriate MCC code to represent their nature of business accurately.
• Transparent Communication: Maintaining clear and transparent communication with payment processors about the agency’s business activities can help ensure proper MCC classification.
• Seek Expert Guidance: Seeking guidance from financial and legal experts can help collection agencies understand Visa’s rules and regulations, ensuring compliance with the new MCC requirements.
• Stay Informed: Collection businesses should closely monitor updates and clarifications from Visa and their payment processors regarding the new MCC rules to adapt their operations accordingly.

Conclusion

Visa’s new MCC rules present significant changes for collection businesses, requiring accurate classification and adherence to specific disclosure requirements. Failure to comply with these new rules can lead to serious consequences, including penalties, reputational damage, and legal actions. By staying informed, seeking expert guidance, and maintaining transparency with payment processors, collection agencies can navigate these changes effectively, ensure compliance, and continue providing seamless payment services to their customers.

To learn more about MCC codes and have a free audit to ensure you are compliant, contact us today!