Underwriting 101

Underwriting, for the sake of this article has to do with the processes that merchant account providers undertake to determine the level of risk associated with each merchant account.  This is important to understand as there is a direct impact , in many cases as to the cost for the processing services being provided.  It is decided as part of the underwriting process if the account is acceptable to board. Factors that are considered as part of this process are:

Merchant type:  One type of merchant poses a greater risk than another. For example, a grocery store poses a lower less risk than an auto repair shop, likewise a collection agency that accepts credit and accepts debit cards and electronic checks may in fact reach the highest level of risk as the card holders are unable to pay their debts and their credit historyis typically poor. The chances of a cardholder having a dispute about vegetables they bought at the grocery store are less likely than a cardholder having a dispute with an auto repair shop about how his car was fixed or the cost. Also the average transaction size for groceries is much lower than an auto repair shop.

Card acceptance method: Card-present (face-to-face) transactions pose a much lower risk that card-not-present transactions. When a card is swiped, it is safe to assume that the cardholder has seen the merchandise and has voluntarily handed over the card to the merchant to pay for it. In card-not-present transactions the cardholder likely has not seen the merchandise and does not take delivery on the spot. Any mail order, telephone order (MOTO) or Internet merchant accounts fall into the card-not-present category. More information is usually collected in the form of a MOTO Sheet, which explains more about the business model of the merchant. There is also a much higher merchant and cardholder fraud rate associated with card-not-present transactions.

Delivery method:   In the event of a grocery store, items are purchased and received by the cardholder right on the spot – there is no delay in delivery. An Internet clothing store accepts cards online, and then ships the goods after the transaction is processed. This is called future delivery. There is a larger chance that the cardholder may not receive the goods.

Another subject under future delivery are membership merchants. A gym that sells annual memberships is riskier than a gym that sells monthly memberships. The reason is if a gym sells 1000 annual memberships for $300 in January and goes out of business in November, then all cardholders have chargeback rights, as the gym is incapable of honoring the contract term that the cardholder paid for. In this case the potential chargeback exposure is $300,000, and that is only from January's sales. Adding the additional months up to November could total as much as $3,000,000 in losses.

Borrowing capacity:  What is the merchant's borrowing history and track record of repayment? How much debt can the merchant handle without adversely affecting its financial performance and cash flow? Will the merchant be able to honor its obligations including the reimbursement of chargebacks and credit losses? This becomes more critical in underwriting for businesses that have a greater predisposition to chargebacks.

Capital: How well capitalized is the merchant? How much money have the owners invested in the business? If the merchant is operating with a negative net worth, for example, do the owners have the financial strength to add more of their own money?

Collateral:  Collateral represents assets that the merchant pledges as an alternate repayment source for any obligations owed to the merchant service provider under the Merchant Processing Agreement. Examples include cash reserves, personal guarantees, certificates of deposit, letters of credit and cross-corporate guarantees, when appropriate.


The greater the predisposition to chargebacks, the more important it is to have credit worthy merchants with proper collateral and capital.
Approved monthly processing volume – Underwriting will evaluate the requested amount on applications and determine if this amount is acceptable, or may opt to lower or raise this dollar figure based on risk.

Approved average ticket amount:  As above with the monthly processing volume, the same counts for the average ticket amount (the amount of each sale).


Reserve Account:  Funds that belong to the merchant are held as collateral in the event of rejects and charge backs. When the risk no longer warrants the reserve, the funds are returned to the merchant.

Deposit Delay: Typical deposit times occur within 48 hours. Most MOTO merchants are set to 1-day delay (72-hour funding).


Underwriting Guidelines:

Underwriting guidelines are structured to require increasing levels of due diligence as the perceived risk of processing increases. The process looks at the type of business, monthly volumes and average ticket size.


1) In order to obtain an underwriting credit decision quickly, ensure that the credit card processing application is complete, and that all the required support documentation is included with your account.

2) Should you require real-time updates as to the status of your account, contact your account representative.


3) For faxed applications it is important to consider the quality of the information being sent. The application must be legible and photo identification must be clear and readable.

4) It is a requirement in Section 326 of the USA PATRIOT Act of 2001 that merchant service providersmust verify the identities of all merchant account applicants. Hence, a government-issued ID must be included with the application package.

5) Credit reports will be obtained for all merchant applications and are reviewed for verification of identity as well as credit criteria. Credit scoring plays a supporting role in the application process; however, there are many other additional factors included in the decision process such as type of business, processing volume and previous processing history. Poor credit history alone does not necessarily result in a decline.

6) Documentation verifying the merchant's business address as well as goods/services being sold may be required on all applicants. You can obtain a list of several types of documents that we can accept with new merchant applications to satisfy those needs.

7)Certain accounts require financial statements, such as:

  • Three consecutive months of business checking account bank statements
  • Company income statements and balance sheet.
  • Last two year-end company federal tax returns, all schedules.
  • Any previous bankcard processor statements.

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