Improper Merchant Underwriting Directly Affects Your Business

To get a traditional merchant account, your business must go through an extensive review process called merchant underwriting. Unfortunately some Merchant Account Providers don’t effectively underwrite businesses, which can lead to issues down the line.

Merchant underwriting is completed by an individual or team of risk analysts and typically takes two days to a week to complete, depending on the provider. For businesses needing a quick fix, there are options that don’t require any underwriting — but those have their own drawbacks. More on that later.

First, let’s go over what underwriters usually review.

Typical Merchant Underwriting Process

The ultimate goal is to assess the business's level of risk for the provider. Why? Because a merchant account is essentially a line of credit. If a business is hit with a chargeback, but doesn’t have enough funds in the bank to pay it, the provider fronts that expense right away.

To accurately determine the risk level, providers review the following:

• Business Type — Every business type has its own level of risk. For example, a business that swipes cards is less susceptible to fraud and chargebacks, and is therefore less risky, than a business that sells products online. The riskier the business, the more support documents and information needed for review.
• History and Policies — This includes years in business, billing, shipping and return policies (if applicable). Businesses that ship products are riskier because the product might not be delivered, which can result in a chargeback.
• Merchant History and Card Acceptance Method(s) — Providers will want to know things like your business’s chargeback ratio (over 1 percent is a red flag), whether your business is or has been on the Merchant Terminated File and, if so, why. Most providers review current merchant statements to get an idea of processing volume and methods of acceptance. Businesses accepting tips or phone and online orders are taken into consideration for added features and security measures, if approved.
• Processing Limits Requested — Providers will take these into consideration in conjunction with the above information. Providers should set your limits at a happy medium — they should accommodate your regular processing without giving too much room in the event of a large fraudulent charge. If your business doesn’t need very high limits, your account shouldn’t be set up that way.
• Financial Stability — This can include a look at the business’s bank statements, its financials and, usually, the owner’s credit. This is vital for high-risk businesses, as this information can make or break the merchant underwriting approval.

Some providers inadequately review businesses, resulting in issues after they’ve started processing.

Poor Merchant Underwriting Aftereffects

Without an in-depth analysis, your business may suffer from one or all of the following:

• Incorrect Limits — Whether you’re left with insufficient or excessive limits, it’s a problem. Limits that are too low will hinder your business from processing your regular transaction amounts, which may prevent customers from paying on time and constrict your cash flow. If limits are set too high, you may get hit with major fraudulent charges you can’t cover.
• Hidden Volume Fees - Some providers will give you a limit, but let you exceed it without warning. The penalty? You’re charged an additional fee on either the volume that went over your limit or on the entire processing volume for that month.
• Downgrades - If your account is set up without certain features and security measures, you're susceptible to transaction downgrades, which means you’re unnecessarily paying higher transaction costs. Providers often fail to set up accounts with these features because it means more money in their pockets on the downgraded transactions.

Some businesses opt for an account with Payment Facilitators, such as PayPal, Stripe or Square, which bypass merchant underwriting altogether. While they may seem like a better option, these alternatives have their own pitfalls.

The Disadvantages of a “Quick Fix"

With no merchant underwriting, your business can suffer from a number of problems:

• Long Hold Times on Funds — You’re subject to long hold times for large, individual transactions with Payment Facilitators. Why? Since they lend out one merchant account, they flag any large transactions to ensure they are legitimate before the money gets passed to you. This keeps your hard-earned money from your bank account.
• High, Non-Negotiable Rates — This type of account doesn’t have a range in options when it comes to your rates, so you’re stuck with one high rate that you can’t change. You end up paying the same rate for swiped or inserted cards as keyed transactions.
• Little to No Customer Support — If your account doesn’t get underwritten by a risk team, you can bet there isn’t a live support staff, either. The only way to get any questions answered is usually via email or support ticket.

The bottom line — Don’t opt for an account just because the underwriting process is quick or nonexistent. It may seem convenient at first, but the issues that follow can negatively affect your business and bank account. Choose a provider that takes merchant underwriting seriously. It may seem tedious, but the long-term benefits will help your business thrive.

Get your statements checked for downgrades.

Has your business suffered from poor underwriting? Tell us about it below. We’d love to hear from you!