Why is there underwriting on a merchant account?

Startups and companies trying to set up a merchant account for the first time are sometimes stunned by how much information they have to provide to get approved. As they learn quickly, the merchant account underwriting process is highly detailed, highly intrusive and highly time-consuming. And if you happen to be a high risk business, underwriting becomes even more of a chore.

The reason for underwriting can be boiled down to one word: Risk.

Credit card issuers (banks) are very conservative by nature. When issuers offer a business the ability to accept and process credit card payments, they are taking a great deal of risk. Consider this: If your customer doesn’t pay the credit card charge and your business doesn’t have the funds to cover it, the bank is responsible for making good on the payment. So, if your business is short on cash, if it has a history of bad business dealings, if you as the business owner or your business itself has a poor credit history, or if your business simply happens to be in a high risk/highly regulated industry, then the issuer’s risk may be too great to justify offering you a merchant account.

The underwriting process is how the credit card issuer reaches that decision.

As already mentioned, high risk businesses should expect a very rigorous underwriting experience. What determines whether a business is high risk? Banks regard certain industries as inherently risky. For instance, take the travel industry. Chargebacks (one of the worst problems in credit card processing) are inherently high because people tend to cancel trips, experience problems with accommodations and refuse to pay, etc. Beyond industry issues, if your business has had a bankruptcy or other red flag problems, your application will undoubtedly fall into the high risk category.

However, note that credit card issuers have different risk tolerances. Performance Card Service (PCS) specializes in high risk payment processing solutions, and we’ve established strong relationships with banks and processors that actively look for merchants in high risk industries. Naturally, since risks vary, fees and terms associated with high risk merchant accounts are not as attractive as those that apply to medium- and low-risk accounts, but they are competitive enough to enable high risk merchants to keep the cash register ringing.

When you start the underwriting process, suppling all the requested information and concealing nothing are critically important. If information is missing or if the underwriting process uncovers inconsistencies, these are red flags that may well result in your application being denied. PCS works with clients to help them gather the correct information and present it properly to the underwriters. This can make a big difference in how quickly the underwriting process is completed and whether your account is approved.

Finally, we encourage you to clean up any issues that may impede your ability to be approved for a merchant account before submitting an application. For instance, if you have some disputed payments that reflect poorly on your personal or business credit report, resolving them before making an application won’t make the problem vanish, but it will demonstrate your willingness and ability to be financially responsible. We will help you with your pre-application strategy if you’re not sure what to do.

Return to FAQ