How to avoid unwanted purchases on company credit card

Dear Your Business Credit,

I know how merchant category codes (MCCs) work. In my school we asked our bank to block MCC codes like alcohol, spas and adult stores to prevent our employees from acquiring unauthorized expenses using corporate cards. If alcohol codes are blocked on our corporate card and an employee goes to Target, coded as grocery store, and buys groceries and wine in one purchase, would the alcohol be coded as groceries if Target rings the sale as groceries? And if so, what is the benefit of our company blocking these codes? Wouldn’t that be giving our directors a false assurance that our staff could not buy alcohol using our corporate card? Thank you. – Imad

Dear Imad,
Your hunch is on the money. Nothing is preventing your employees from going to Target and buying alcohol with their corporate cards, but not for the exact reason you think.

First, let’s do a quick review of MCC codes for readers who may not be familiar. MCC codes are four-digit numbers that the major credit card companies assign to a business when it initially begins accepting credit cards. They are tied to the type of merchant – such as grocery store, snowmobile merchant or automotive tire store – not the list of items purchased once someone is shopping with that merchant. If, for instance, I go to a snowmobile shop and, while at the store, buy a soda along with my snowmobile, the snowmobile and the soda will not have different MCC codes. In the travel and entertainment arena, major companies such as airlines, car rental companies and hotels often have their own MCCs.

As a result, if you wanted to prevent your employees from buying alcohol and know that it is sold at Target, you would have to block all purchases with that store’s MCC code. “If an MCC code is not blocked, an employee could use their corporate card there,” Randy Hayashi, COO of Payment Depot, a credit card processing company based in Orange, California, said in an email.

How a store is coded may vary depending on where it is located, so if you are concerned about blocking specific stores in your area, I would suggest asking your merchant processor to help you identify their MCC codes.

However, there is another step you can take as well: Communicating with your employees. “I would recommend that employees are clearly notified that these purchases are blocked, wherever possible,” advised consultant Patricia Hewitt, a strategic advisor to the payments industry at PG Research & Advisory Services in the Savannah, Georgia, area, in an email. “While the company can’t stop employees in all cases, they can in many. Furthermore, they’ve established the fact that in their corporate environment, these kinds of purchases are considered taboo.”

Many companies have a policies-and-procedures manual that covers credit card usage, or they issue a written policy pertaining specifically to the company credit card. If you don’t want employees to buy particular things with their company credit cards, I suggest having your attorney draft such a document. Explain in writing what the consequences will be if they make the unauthorized purchases. For more detail on how to do this without running into legal problems, please see my previous column, “Handling employees’ personal purchases on company cards.”

I’d also give careful thought to how many employees actually need company cards. Perhaps it is best to issue them only to your executive team. If general employees make only an occasional purchase, having them use their own credit cards and submit the receipts for reimbursement may be a better system for you. The more you limit distribution of the cards, the less potential for abuse there will be.

See related: Handling employee abuse of a business credit card, Does a business card’s guarantor own its rewards points?, Should I give more employees company cards?