For most business owners wishing to process credit and debit card transactions, obtaining a merchant account is a necessity. That is because it is through this type of account that electronic payments are securely facilitated. Just as is the case with the retailers they support, the providers of merchant accounts are in the game to make a profit, and therein lies the reason for account underwriting. If you are on the hunt for the best possible arrangement with one of these companies, it is important to understand what the underwriting process is, why it is necessary, and steps you can take to make the process easier for your business.
What does underwriting involve?
Acquirers, the financial institutions that process debit and credit card transactions for retailers, want to be absolutely sure that the risk they are taking on when approving you for a merchant account is a solid one. In order to protect themselves, they make it their duty to rigorously evaluate and analyze the application that you submit. This is known as the underwriting process. Throughout it, the acquirer takes pains to ensure that your business is honest, in good standing, and likely to follow through on the terms to which you have agreed. To that end, they carefully investigate your business to ensure that you are not fraudulent and that your security systems are in compliance with industry standards. Questions that they commonly ask include the following:
- Are you in an industry that is prone to frequent fraud and customer refund requests?
- Are you applying for the account solely to be granted a line of credit that you will then use for illegal purposes?
- Are you committing identity theft?
- Is it possible that you will attempt to launder ill-gotten funds through the account?
Needless to say, answering “yes” to any of these questions would make your company an exceedingly poor risk for your payments partner and would disqualify you from receiving the account you are requesting.
The bottom line is that you need to come across as a viable business to the acquirer. In other words, is your store likely to consistently make enough money in sales to cover debts as well as planned and unforeseen expenses? Equally important, does it appear likely that you will have enough funds on hand to continue growing your business? If so, you will probably be determined to be an acceptable risk, which means that the acquirer will accept the risk of loss that you represent and will cover the costs of any charges against the account should you default on your payments.
Another red flag that acquirers analyze during the underwriting process is the potential for chargebacks, which occur when customers go directly to their bank to request a refund after making a purchase from you. Chargebacks are expensive and time-consuming for all parties, particularly merchants, and inevitably result in financial losses for business owners — even if they ultimately are not found at fault. In some extreme cases, business owners may lose account privileges and be rendered unable to accept credit card payments. Although a chargeback once in a while is to be expected, too many of them can place your business in a high-risk category.
The underwriting process.
As stated above, acquirers use several criteria to determine if a business like yours is worth the risk. For one thing, they go by industry data security standards (like PCI compliance) to ensure that the way your company handles and transmits information is as airtight as possible. In addition, most account providers are very strict about what products they are willing to underwrite. adIn other words, if your business markets items such as drug paraphernalia or adult entertainment materials, you will either be rejected outright or, in most cases, raised to a high-risk status and charged more.
During underwriting, expect your financial records to be scrutinized carefully, and be totally forthcoming about all of your operations. The truth will come out sooner or later, and it is far better to be transparent about any problem areas right from the start. You will also be asked about your business background, all of your locations, and each of your principal employees. In order to access the data they need, an underwriter will probably request access to your financial records, bank statements, credit reports, and income tax returns. Once all of this intelligence has been gathered, the acquirer will know: that your business is legitimate and that you own it; how long you have been in operation; what type of business you are running (sole proprietorship, partnership or corporation); and will be aware of any bankruptcies or other difficulties you have experienced in the past. In addition, the underwriter will research any previous relationships you have had with other merchant account providers.
During the investigation, think of your business operations as an open book. To that end, be prepared to provide information like:
- Statistics about your operations.
- Details about how you keep data secure.
- Information about how you handle chargebacks.
- Your protocols for orders, shipments, and customer billing.
- Your credit, refund, and exchange policies.
- Any warranties or subscriptions you offer.
- Information about your products and inventory, including stocking and restocking procedures.
- Specifics about your business’ history, frequency of customer disputes, and how they are handled.
In addition, the assessor will take a long look at your business environment. Relevant questions likely to be asked include the following:
- Is the geographic location suitable?
- Does it have a history of criminal activity there?
- Is the property leased or owned?
- How long have you been doing business there?
Finally, the underwriter will gather data about each of your principal employees, including:
• Identification details.
• Percentage of ownership for each principal.
• How long each principal has had partial ownership of the business.
Special considerations for online merchants.
If you want to accept payments online, you may be asked additional questions. Because of the increased risk involved in internet transactions, the underwriter will want more information, like:
- Domain and website ownership information.
- Your customer service procedures.
- Information about any affiliates.
- Data privacy protocols.
- Sales terms.
- Currency requirements.
- Legal conditions, export restrictions, etc.
- Delivery and return policies.
- Card data security procedures.
As you can see, the process of obtaining merchant accounts can be both lengthy and detailed. However, bear in mind that underwriting protects everyone involved, including you as the business owner. Above all else, obtaining an account with a company you trust and at fair terms that you can afford, benefits you and the customers you want to serve. Once the underwriting ordeal is finished, you can look forward to smooth sailing and a payment transaction environment that will benefit everyone involved.