Merchant Account Underwriting Basics

Dana Salman — April 26, 2020

If you are operating a business, you probably have or need a merchant account with a payment processor for your business to accept payments. Before the payment processor can create a merchant account and provide a Merchant ID (MID), the merchant goes through what is called an underwriting process.

The underwriting process involves careful analysis and evaluation of merchant account applicants to ensure that businesses that wish to accept payments from customers are viable, and able to meet certain basic standards.

Underwriting in payment processing

The Underwriting process is where a payment processor evaluates the potential risk associated with a merchant. Merchants accepting payments must be able to fulfill financial obligations; for charges that might result from excessive refund and chargeback transactions, for instance. The merchant account underwriting process addresses these concerns with due diligence.

This is why information is required from the merchant before a merchant account is created. The underwriter will evaluate the information collected for each merchant such as:

• Years in business: The longer a business has been operating, the less the associated processing risk. Businesses that have been operating for 2 or more years, tend to have a stable cash flow and defined costs.
• Business type: The products and services sold and the type of customers served. Some business types are deemed higher risk by financial institutions and payment processors and therefore may require more information in the application.
• Billing method: Does your business charge quarterly or annually? The longer the billing cycle, the higher the risk.
• Chargeback history: has there been past issues with chargebacks (ie. higher than 1% rate).
• Credit score for the owner: The business owner’s credit score is a factor in evaluating risk; the higher the credit score, the better.

The underwriting process may seem unnecessary but it is a critical step in setting up a merchant account. Good merchant providers can normally do all this and get you approved very quickly.

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