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End to End Guide to Merchant Credit Underwriting: Process, Document Requirements, and More

December 26, 2024

8 minutes read

🗒️  Key Highlights
  • Payment processors accept full financial liability for merchant transactions, facing potential losses if approved merchants declare bankruptcy or commit fraud.
  • To manage risk exposure, payment service providers typically reject between 5-10% of merchant applications after thorough underwriting assessment.
  • The average consumer made 46 monthly payments in 2023, with 60% via cards – highlighting the need for reliable electronic payment systems.

Payment processors need to trust the businesses they work with – after all, they’re handling money on your behalf.

That’s where they conduct merchant credit underwriting – a risk assessment process.

Put simply, your financial history, business operations, and transaction patterns all influence whether processors will work with you and what terms they’ll offer.

If you have next 6 minutes, we’ll walk through everything that matters: why processors need it, what the process looks like, document requirements, deciding factors, and how to present your business in the best light.

What is Merchant Credit Underwriting?

💡 Related Blog: Global Remittance

Merchant credit underwriting is a risk assessment process of evaluating whether your business is financially sound and trustworthy enough to handle electronic payments. Payment processors act much like banks offering lines of credit – they need to verify that merchants are worthy of the trust placed in them.

Here’s a simple example: Imagine Sarah’s starting an online bookstore. Before she can accept credit card payments, her payment processor needs to make sure she’s running a legitimate business, not a front for fraud. They’ll also want to verify she can handle potential chargebacks if customers dispute their purchases.

For businesses, this might sound like a lot to take in. But understanding the basics makes the whole process much more approachable. 

First, let’s see why it’s needed.

Why is Merchant Credit Underwriting Needed?

Before letting businesses handle customer payments, payment processors need to know who they’re working with for multiple reasons. 

  • Financial Security: If you think, when a customer pays a merchant, the processor is essentially extending a short-term loan until that transaction fully settles. As issues can arise (merchants might default on responsibilities), payment processors verify that merchants can handle their financial obligations, including potential chargebacks and processing fees. 
  • Fraud Prevention: Credit underwriting helps identify and stop fraudulent businesses before they can harm customers or payment systems. This includes checking for signs of money laundering, identity theft, or other deceptive practices.
  • Regulatory Compliance: Financial institutions must follow strict regulations about who they do business with. Proper underwriting ensures compliance with laws like Know Your Customer (KYC) and Anti-Money Laundering (AML) requirements.
  • Consumer Protection: By carefully evaluating merchants, payment processors help protect consumers from fraudulent sellers, ensuring they’re dealing with legitimate businesses that will fulfill their obligations.
  • Risk Management: Different business types carry different levels of risk. Understanding these risks through underwriting helps processors set appropriate fees and reserve requirements to maintain a stable payment ecosystem.
  • Payment System Integrity: Every debit/credit card and ACH transfer relies on trusted merchants. Underwriting helps maintain this trust by verifying businesses before they handle payments.

Factors Considered in Merchant Credit Underwriting

Before we start, it’s worth noting that no single factor determines approval or denial. Processors look at how these elements work together to form a complete risk profile. 

For example, a newer business might make up for limited history with strong financials and a well-thought-out business plan.

Factor What It Means For Your Business
Creditworthiness Beyond just credit scores, processors examine personal and business credit history to gauge financial responsibility and reliability in meeting obligations.
Financial Stability Current bank statements, revenue patterns, and cash reserves show if a business can handle processing volumes and potential chargebacks.
Industry Risk Some industries naturally carry higher risk due to regulations, customer behavior, or product type. This affects approval odds and processing fees.
Transaction Volume and Size Expected monthly processing volumes and average transaction amounts help determine risk levels and reserve requirements.
Chargeback History Previous chargeback rates indicate customer satisfaction and fraud prevention effectiveness. High rates raise red flags.
Business History Operating history, including past merchant accounts and processing relationships, provides insights into business stability.
Business Structure The legal structure (LLC, Corporation, etc.) and ownership details help establish accountability and verify business legitimacy.

While it might seem like they’re being overly cautious, each factor helps determine a complete picture of a business’s risk profile and operational stability.

Merchant Credit Underwriting Process

While it might seem complicated at first glance, merchant credit underwriting follows a logical sequence of steps designed to verify, assess, and approve businesses for payment processing.

Step 1: Document Collection and Verification

Before anything else, you’ll need to collect all your business paperwork. Here’s the list of documents you require for merchant credit underwriting.:

Document Category Required Documents
Bank Documentation Last 3 months’ bank statements

Voided business check

Bank letter (if needed)

Dedicated business account details

Processing History Previous processor statements

Current processing volumes

Transaction history reports

Financial Records Income statements and balance sheets (especially if processing >$750K/year)

Tax returns

Business and personal credit reports

Business Verification Business licenses

Registration certificates

DBA documentation

EIN or Tax ID proof

Supporting Materials Business plans

Marketing materials

Return policies

Inventory reports

Step 2: Application Review

Underwriters need to know who you are and what your business does – so fill applications carefully. And no, “consulting services” isn’t specific enough – they’ll want to know exactly what kind of consulting you provide. Applications marked simply as “online business” almost always get flagged for further review.

To assess your financial stability, underwriters will look at your cash flow, revenue, and, most importantly, your ability to handle potential chargebacks. 

Step 3: Know Your Customer (KYC) and Anti-Money Laundering (AML) Checks

This stage ensures businesses operate within legal and industry guidelines by conducting KYC and AML checks.

Here underwriters:

  • Verify the identity of all business owners with more than 25% ownership
  • Check against government sanction lists like OFAC
  • Validate business registration and licenses
  • Screen for high-risk or prohibited business activities
  • Monitor for potential money laundering patterns
  • Verify the legitimacy of business operations and funding sources

Step 4: Follow-Up

Maybe your tax returns don’t match your projected volume, or perhaps underwriters need clarity about your business model. Being responsive and transparent during this stage can significantly speed up your approval process.

Step 5: Application Approval or Denial

The final stage brings together all the collected information to make an informed decision. If approved, you can start processing electronic payments and vice versa.

Also, it won’t necessarily be a yes or no. Maybe you’ll need a reserve account, or perhaps your processing limits will start lower and grow with your business. Payment processors with a good underwriting team will work to find solutions rather than just saying no.

Step 6: Post-Approval Monitoring

While technically part of ongoing risk management rather than initial underwriting, it’s worth noting that the process doesn’t end with approval. It’s an ongoing process and payment processors track merchant transactions to spot upcoming risks and suspicious activities early. 

Best Practices for Merchant Credit Underwriting

#1 – Clear Documentation Structure: Create a digital folder for these documents as soon as you start your business (second best time is from now). It makes life so much easier when it’s time to apply. Update them monthly rather than scrambling during applications.

#2 – Accurate Business Representation: Share your real business model, complete with revenue patterns and operational details. For instance, “We provide monthly subscription boxes for artisanal coffee, averaging $45 per customer with 80% retention rate” tells underwriters exactly what they need to assess.

#3 – Financial Discipline: Keep pristine separation between business and personal finances. Maintain consistent bookkeeping practices and regularly review your financial statements. Clean records reflect professional business management.

#4 – Volume Projections: Present realistic processing volumes based on historical data or solid market research. If you expect seasonal spikes, document the reasons – like a retail business projecting higher holiday sales.

#5 – Credit Management: Address any credit issues proactively. Document steps taken to resolve past problems and maintain current good standing. Remember, underwriters look at this as an indicator of financial responsibility.

#6 – Leverage Technology: Modern verification solutions streamline the underwriting process significantly. 

Tools like Signzy offer:

  • Identity Verification: Use digital ID verification to ensure your customers are who they claim to be. This helps prevent fraud and shows processors you’re serious about risk management.
  • Bank Account Verification: Verify your customers’ bank accounts in real-time before accepting payments. This reduces your risk of payment failures and chargebacks – key factors processors look at during underwriting.
  • Age Verification: If you sell age-restricted products, automated age verification can help you stay compliant with regulations. This responsible approach to compliance can strengthen your underwriting application.
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Frequently Asked Questions

Possible, but you may face higher fees or reserve requirements. Recent improvements in credit scores help your case.

No, but new businesses may need more documentation about business plans and financial projections.

You’ll receive specific reasons. Address these issues and reapply, or consider working with processors specializing in your business type.

Generally no. Some processors offer provisional accounts with limited features, but full processing requires completed underwriting.

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