If you are planning to start a business, you will need a merchant account with a payment processor. The purpose is to be able to take payments. For a payment processor to create a merchant account, a merchant needs to go through a merchant underwriting definition process. It is surprising how many merchants are not aware of this until they start looking for a payment processor. This process is straight forward but can be tricky for a high risk merchant account.
Merchant Underwriting Definition
Merchant Underwriting is the process of evaluating and analyzing the merchant account application to ensure that a business is capable and has the right to start taking payments. Underwriting is done by ensuring that the company abides by specific standards and rules. The merchant must pass through an application or underwriting process, which helps the acquiring bank make sure that the business is viable to take payments and meet customer needs.
What is the Merchant Underwriting Process Like
The first step for any online business is to get a merchant account. And while this process can be quite strict, it is not as bad as it seems. Many businesses get approved quickly and eventually manage to obtain the right to higher sales volume by gaining their payment processor's trust. Sometimes this process can take only a few hours.
The merchant underwriting process considers the business's background, business type, financial stability of the business, and any prior or potential risk of fraud or chargebacks. The underwriter may ask for specific documentation from the business like its financial statements and income tax returns.
All the information gathered will help the underwriter estimate the business's revenue and the chances of customer chargeback or the potential for fraud.
Considering the Business Background and Type
The underwriters and payment processors will first want to look at the business background and the business type. The review happens for the sole reason that some business types are considered high risk. Likewise, some businesses have already had a merchant account shut down due to specific issues such as excessive chargebacks or fraud. There are industry types scrutinized from the get-go, and just because of their branch, these merchants can be denied an account immediately.
Businesses with a high risk must demonstrate that they have the financial strength to support their model. However, some industries are considered so high risk that many merchant account providers will refuse to process payments for them altogether.
All the other indicators needed during the underwriting assessment are to determine the sales volume that the business can process. Small businesses should be advised to start with smaller volumes, while bigger businesses with a reliable payment background can apply for higher sales volumes. The whole point is building trust with your payment processor at the end of the day.
Chargeback and Fraud History
There are cases where the merchant had a past merchant account. The past account's information will be considered when applying for a new account. The underwriter will look at whether the merchant had either a chargeback or a fraud history. That type of issue can be exposed if their customers reported that they charged them for unauthorized purchases. A merchant with a high chargeback rate will have a more challenging time getting a merchant account underwriting process.
An underwriter or payment processor will also consider the payment types and the needs of your business. If they cannot support the payment types your business requires, they may deny your merchant account. Some underwriters may identify the business as risky. Risky businesses may have their products delivered after the customer's payment, which creates the opportunity for higher chargebacks. The same can be considered when thinking about the subscription industry and recurring billing.
The Merchant Account Application
Merchant account underwriting requires a thorough review and rigorous examination by acquirers of merchant account applicants to ensure that entities that seek to receive online payments are credible, competitive, and comply with some minimum standards.
Here are some documents that you will need to submit for your application:
- Copy of your driver’s license
- Copy of voided check with the following business information:
- Account name
- Account number
- Routing number
- Most recent credit card processing statements
- Most recent tax returns
- Financial statements
- Most recent bank statements
- Information about How Your Business is Setup (DBA, Partnership, Corporation)
The underwriting process may seem needless, but setting up a merchant account is a crucial move. Typically, trusted merchants would do all this and get accepted very easily. It is a little bit of a longer process for the high risk merchant account, but it is not impossible.