Why Industry Classification Matters

Every business operates in an industry - restaurants, construction, software development, retail. But in business verification and financial services, knowing which industry isn't just helpful, it's essential. Industry classification determines:

What products you can offer: Some industries are restricted or prohibited for certain financial products (e.g., cannabis businesses face banking restrictions, gambling has limited credit access)
How much risk you take on: A restaurant has different default rates and fraud patterns than a software company
What terms you offer: Interest rates, loan amounts, and underwriting criteria typically vary by industry
How you monitor behavior: A construction company making large equipment purchases is normal; a consulting firm doing the same might signal fraud

The challenge? Unlike personal identity (where everyone has an SSN), there's no universal system for classifying businesses. Instead, several systems coexist, each designed for different purposes.

The Three Major Classification Systems

NAICS (North American Industry Classification System)

NAICS is the standard for government statistics and most business reporting in North America.

How it works:

Hierarchical 6-digit code developed by US, Canada, and Mexico
Most widely used for statistical analysis and government reporting
Updated every 5 years to reflect economic changes

NAICS codes help you understand what a business actually does, enabling quick risk assessments and prohibited industry checks.

Structure Breakdown:

Sector (2 digits) → Subsector (3 digits) → Industry Group (4 digits) → NAICS Industry (5 digits) → National Industry (6 digits)

Example: 722511 = Full-Service Restaurants
- 72 = Accommodation and Food Services
- 722 = Food Services and Drinking Places
- 7225 = Restaurants and Other Eating Places
- 72251 = Restaurants and Other Eating Places
- 722511 = Full-Service Restaurants

MCC (Merchant Category Code)

If NAICS is for general business classification, MCC is specifically for payment transactions. Every merchant that accepts credit or debit cards is assigned an MCC by their payment processor.

Some lenders prohibit businesses in high-risk MCCs. It also has been demonstrated that MCCs can help predict transaction patterns and fraud likelihood.

How it works:

A 4-digit code used by credit card networks (Visa, Mastercard, Amex)
More granular for retail and service industries than B2B services
Critical for payment processing and merchant risk assessment
Determines interchange fees and processing rules

Risk tiers:

Card networks categorize MCCs by risk level:

High-risk MCCs (gambling, adult entertainment, travel agencies, telemarketing): Higher processing fees, stricter requirements, potential for more fraud or chargebacks
Medium-risk MCCs: Most retail and service businesses
Low-risk MCCs (utilities, insurance, professional services): Lowest fees and fraud rates

Example: 5812 = Eating Places, Restaurants

SIC (Standard Industrial Classification)

SIC is the older classification system, largely replaced by NAICS but still used in some contexts.

Some data sources and compliance systems still reference SIC codes. Understanding the relationship between SIC and NAICS helps when working across multiple data providers.

How it works:

A 4-digit code
Less hierarchical and less granular than NAICS
Still used in some financial and regulatory contexts
Last updated in 1987

When it's still used:

SEC filings and some financial reporting
Legacy databases and older systems
Certain regulatory requirements

The Industry Classification Challenge

When a business applies for a loan, payment processing, or any financial service, you need to know their industry to assess risk and ensure compliance.
But:

Challenge 1: Businesses don't report industry consistently

Application forms may ask "What type of business are you?" with free-text fields
Applicants might say "retail" (too vague), "Amazon reseller" (not a standard category), or misrepresent intentionally to bypass restrictions

Challenge 2: You can't rely on official registries

Secretary of State records typically don't include industry classification or NAICS codes
You can't rely on government data to accurately know what a business actually does

Challenge 3: Self-reported industry may be inaccurate or fraudulent

A CBD company might claim to be "health and wellness" to avoid cannabis restrictions
High-risk merchants might describe themselves as low-risk businesses
Legitimate businesses might not know their correct NAICS code

Challenge 4: Industries evolve faster than classification systems

Is a "creator economy platform" media, technology, or financial services?
How do you classify a business that's part e-commerce, part subscription service, part marketplace?

How Industry Prediction Solves This

Modern business verification platforms like Baselayer use AI-powered industry prediction to solve these challenges:

What it does

Analyzes business name, address, website content, and other signals
Predicts the most likely NAICS code, MCC, and SIC classification
Provides confidence scores and supporting keywords
Works even when businesses don't self-report website, industry or provide incomplete information

Why this matters

Catch misrepresentation early: If an applicant claims "consulting" but their website shows they're a cannabis dispensary, you can flag before extending credit
**Enable automated decisioning: **Block prohibited industries instantly without manual review
Assess risk appropriately: Apply correct underwriting criteria based on actual business type, not what they claim
**Ensure compliance: **Screen against your institution's restricted industry list accurately

Example scenario

Applicant business name: "Green Valley Wellness Center"
Applicant stated industry: "Health and wellness retail"
Website analysis reveals: CBD products, marijuana accessories
Industry prediction: NAICS 453998 (All Other Miscellaneous Store Retailers - Cannabis)
MCC: High-risk retail
Result: Flagged for review or auto-declined based on your cannabis policy

For detailed information on how Baselayer's Industry Prediction works and how to use it in your verification workflow, see our Industry Prediction Guide.

Key Takeaways

Industry classification is fundamental to risk assessment - different industries have vastly different risk profiles
Three systems coexist: NAICS (general), MCC (payments), SIC (legacy)
Official sources don't usually help: Secretary of State registries don't include industry data
Self-reporting is unreliable: Businesses misclassify accidentally or intentionally
AI-powered prediction is essential: Modern verification requires automated, accurate industry classification based on multiple signals
Industry impacts everything: From whether you can serve a customer to what terms you offer to how you monitor them