Factors & Guidelines to Merchant Service Underwriting and Why It’s Important

It is important to open a high-risk merchant account to carry out financial transactions especially if your business requires an online payment gateway through which you can accept payment by multiple payment methods. To acquire a high-risk merchant account, you have to first find a credit card processor, which meets your needs and provides you services at a reasonable price. When you apply for this account, you cannot get started by just filling an application form. The application (in turn your business) has to go through a wide analysis process. This process is called improper merchant underwriting.

What is Merchant underwriting?

When a merchant chooses a high-risk payment processor to process its payments, the two parties will sign an agreement, with this agreement being referred to as a financial contract. The underwriting process tends to be very stringent and is used to help determine how credible the merchant is in relation to its own credit card worthiness and business reliability; this process starts when a merchant puts in an application to obtain services from a payment processor.

All About Merchant Account Underwriting

Gathering this information is part of the high-risk merchant account underwriting process that each merchant account provider must follow for each new merchant account. A merchant account underwriter will look at how long you have been in business as well as your financial history. You will need to furnish information about your products and/or services as well as how you generally conduct business.

Merchant Underwriting Process

The merchant account is basically a line of credit. In case of chargebacks, the amount is deducted from the merchant's account, but if there are not enough funds in the bank to pay for chargeback then the provider pays that amount right away to the customer. So the essential part of underwriting is to evaluate the risk level of merchant’s business. Following are the things that provider review:

After Effects of Poor Merchant Underwriting

Your high-risk business may suffer from one or the other reason even without in-depth analysis and these are:

Incorrect Limit: You should set limits for your business as per requirement. It should not be too high or too low, as both the cases will end up in putting your business in a problem. Limits lower than required will hinder the regular processing of transactions that may constrict the flow of cash or timely payments from the customer, whereas if the limit is too high, this may lead to unexpected fraudulent charges.

Hidden Fee: An additional fee is charged if the volume exceeds the limit. However, even if you have set your limit, some providers let it exceed without notification and charge you with the penalty.

Downgrades: Once your high-risk merchant account is set, you are inclined to transaction downgrades if certain required features and security measures are not set along with the account. Although, setting up these features will cost you more, but will help you in long run and enable smooth processing of transactions.