If you own a business, you most likely have or will require a merchant account to accept payments. However, before you can open a merchant account and obtain a Merchant ID, you must first go through the underwriting process.
The underwriting process involves a thorough review of merchant account applicants to ensure that businesses that seek to accept client payments are viable and capable of meeting some basic standards.
In this article, we will look at how a merchant account underwriter evaluates risks, how you can improve your merchant account eligibility, and the criteria that are taken into account during the underwriting process.
Risk Evaluation By Merchant Account Underwriters
Processors and underwriters often believe that some companies are riskier to deal with than others. Risk assessment is determined by the needs of the bank or financial institution that will handle your transactions. Most of them consider the following factors when underwriting a business for a merchant account.:
The Business Type
There are various industry classifications, and each one is assessed for perceived risk by a merchant account underwriter. So, regardless of other factors on the application, an application can be denied during the underwriting process based on the industry in which the business operates. The following examples can help you determine which risk category your business might fall into:
- Low-Risk Merchant Account: These are usually restaurants and retail establishments.
- Medium Risk Merchant Account: eCommerce stores, legal firms, and telecommunications and utility services are all examples of such businesses.
- Higher Risk Merchant Account: This account is created for businesses such as gyms, charities, insurance agencies, monthly subscription businesses, web development or game development organizations, and so on.
Years in Business
Business longevity can influence the merchant account underwriting process. The best-case scenario is a business that has been in operation for at least five years. They often have a strong customer base and a continuous flow of income. This is vital to a merchant account underwriter because it shows that the business can effectively respond to unforeseen circumstances, such as chargeback fees. Hence, there is a good chance that such a business would be considered lower risk.
If you’ve previously had a merchant account, underwriters may want to review your chargeback history. A chargeback may be issued by the cardholder if they believe that a charge was made without their authorization or that the product or service was not delivered as promised. A business that has a high number of chargebacks on its previous merchant account will experience bigger challenges during the underwriting process.
Most merchant account underwriters will examine your billing process to evaluate the cash flow risk. If a business charges in advance before producing products or services, a merchant account underwriter will view it as a higher risk. This is because circumstances might have changed and the product or service was no longer used or required by the customer. For example, if you sell tickets for an event three months in advance and then cancel it due to unforeseen circumstances, you have to reimburse your customers. When situations like this occur frequently, chargeback rates will skyrocket, and a high chargeback history places you in a higher risk category.
A poor credit score affects the merchant account application process, just as it does with most loan transactions. If a merchant has bad credit, he should present financial statements instead of a credit score. If a business has a team with good credit scores, it is recommended that they apply for a merchant account.
When it comes to merchant account underwriting, one of the most crucial considerations is the requested volume. It is not unusual for brand new businesses to have a lower volume processing cap until their business strategy has proven effective. When their business stability is guaranteed, the cap will be raised.
Unique Situations for Approval
When reviewing a merchant account application, an underwriter must consider some unique situations. These unique scenarios can sometimes be accepted for a merchant account if a few changes are made in how the payment is processed.
- Upfront reserves – To reduce their risk, the processor keeps an upfront, predetermined amount of money during the early phases of the merchant account. This usually occurs exclusively on high-risk accounts.
- Holds – The processor will withhold a specific amount of funds from each transaction until a history with the merchant is created.
- Daily processing fee withdrawal – Processors typically debit their fees monthly, however, in the case of new accounts, they may want to debit accounts more often to ensure they get their funds.
How to Improve Your Merchant Account Eligibility
Instead of being worried about not being able to get a merchant account, look for strategies to improve your merchant account eligibility. To achieve this, follow these tips:
- Ensure a good credit rating. Before applying for a merchant account, remove any previous late payments and bankruptcies from your credit history. Contact a credit reporting agency or a company that offers consolidated credit reports from leading reporting agencies, such as TransUnion and Equifax, to acquire your credit report. Inform them that these issues have been resolved and request that they be erased from your credit report.
- Be honest and acknowledge past financial challenges. By disclosing previous financial difficulties, you increase your credibility and may face one fewer hurdle to acquiring a new merchant account. You cannot conceal information that is part of the public record.
- Be willing to accommodate special account requirements. If special restrictions or slightly higher fees are required to open a merchant account, go ahead and do it. It is worthwhile to offer as many cashless payment options as possible to your customers. It will assist you in generating revenue and driving impulse purchases.
When looking for how to successfully open a merchant account, know what to expect. If you use the strategies outlined above, the process of obtaining a merchant account ought to go smoothly. Consequently, getting approved will put you on the path to generating more revenue for your company.