Knowing what to expect will demystify the merchant account underwriting process if you’re planning to accept ACH or credit cards for your business. A little planning will go a long way toward meeting standard requirements for obtaining an approved merchant account.
This article will walk you through the criteria that underwriters use to assess prospective merchants. Meeting these criteria will improve your likelihood of getting an approved merchant account and building profitable relationships with your customers, acquiring banks, and merchant service providers.
What is a Merchant Account?
A merchant account is a business bank account specifically created for your payment processing revenue. Payments processed for all the business’s goods and services in the brick-and-mortar retail store, through IVR, online in a secure payment portal, or through email and SMS text invoicing, settle from this account daily. The acquiring bank sets up and maintains the account and processes related fees, including transaction mark-ups set by merchant service providers and payment card interchange rates determined by major card brands. These brands include Visa, MasterCard, American Express, Discover, UnionPay, and JCB. The Originating Depository Financial Institution (ODFI) will set a cost for ACH processing, which the provider will then set a transaction mark-up. Due to ACH and echeck transactions having fewer fees assessed, these charges are less than credit card processing fees.
Payment gateways can help establish a merchant account for businesses to accept credit cards, debit cards, and other electronic payments like ACH and eChecks. Merchant service providers deposit these funds in good faith—before clearing the transaction—on behalf of business owners. As a precursor, a business will endure an underwriting process, a series of rigorous vetting procedures requesting information on the nuts and bolts of the establishment’s history and finances. This underwriting process will minimize risk and ensure that the ACH payments and the credit and debit card transactions processed and settled derive from merchant accounts deemed lawful, compliant, and trustworthy.
What is Merchant Account Underwriting?
Acquiring banks assume risk on behalf of merchants, which they mitigate by screening out high-risk business categories and practices. Merchant account underwriters look for financially-sound merchants that meet ethical business guidelines set by the card brands.
Merchant account providers, banks specializing in business banking, dedicated ACH processors, accounting software providers, and payment gateways issue the accounts to consumers, assuming a certain level of risk when providing merchant payment services. For example, the issuing providers are responsible for the funds if an ACH or card transaction is charged back. In addition, payment processors that support illegitimate businesses will face harsh penalties, fines, and even business closure.
The thorough nature of the underwriting process can be confusing for a first-time applicant. Not all small and midsize business owners (SMBs) are familiar with payments industry terminology, and many SMBs may not be aware of the qualifying criteria they need to meet to make a positive first impression. Work with an experienced processing partner so that you feel confident navigating the underwriting process.
What will the bank want to review?
Merchant account underwriters conduct a thorough review of your company and background. The following six qualifiers help them validate your business’s honesty, integrity, and viability.
Business Bank Account and Business Type
Merchants must utilize a dedicated business bank account, a fundamental requirement when applying for a merchant account. Maintaining a separate account for business finances and expenses demonstrates that you’re serious about your business. It reduces your liability in producing financial reports co-mingling with personal or additional business’ expenditures. Prevent raising your risk level by avoiding low or overdrawn balances. Bank statements that provide proof of your business account with a positive balance will improve your ranking with underwriters.
Your industry may lean towards easy acceptance in the application process, and underwriters want to see established business types in familiar sectors. Conversely, evaluators will seek a more in-depth examination of the business when the descriptions of the business type or the products appear vague or cryptic on the merchant account application or send a rejection letter. Providing marketing materials, websites, or other documentation to prove your company’s existence and legitimacy will postulate an easier path to acceptance of your merchant account.
In addition to furnishing bank statements, additional documents such as financial statements and processing statements help to create a comprehensive profile of your company’s financial competency. Documentation that reflects your company’s typical transaction flow over the past two years will show underwriters how you manage chargebacks, the reversal of funds to the customer once paid to the merchant, and the steps you take to mitigate fraud. They also want to evaluate your average daily and monthly transaction volume and transaction amount. Combined with a credit check and personal statements, these documents reassure merchant account providers that your business is reliable, creditworthy, and maintains a consistently low chargeback percentage.
Articles of Incorporation
Articles of incorporation affirm your legitimacy and legal standing in the business community by signifying your business structure and operations as either a limited liability company (LLC), sole proprietorship, partnership, corporation, or cooperative. In addition to defining your business structure, you’ll need to include your Employer Identification Number (EIN), a unique identifier assigned by the Internal Revenue Service (IRS) used in filing business taxes.
Although new businesses get accepted, underwriters prefer more established companies with more than five years as a base business. The longer an applicant has been in place, the more likely they understand how to mitigate potential financial risks, including fraud and chargebacks.
The PCI Data Security Standard (DSS) is a set of rules developed by the card brands to protect data and establish best practices in credit card processing. Achieving and maintaining PCI compliance is a requirement for accepting credit card payments and reduces the potential risk of fraud for participating merchants.
Following PCI guidelines will help you assess your business environment’s security when applying for a merchant account. Implementing multilayered security procedures such as shredding documents containing credit card numbers, installing virus protection and anti-phishing software on all connected devices, and using the most up-to-date software for your business computers will further protect you against data breaches and unauthorized access to your business network and environment.
Supporting Documents that Establish Credibility
The issuing bank may request additional documentation to establish the legitimacy of your business further. Underwriters frequently request corporate documents on business policies such as billing, shipping, refunds, and returns. The underwriter will want to review how your business manages whether payments process upon the time of goods and services rendered or if you bill in advance, your procedure for taking action on returns, and how you intend to process refunds for your customers. A comprehensive strategy involves providing appropriate timeliness for customers receiving their purchases and offering quality “blue chip” goods and services to avoid reimbursing customers in the future. Ethical and fair business practices reduce the risk of chargebacks and returned or canceled ACH transaction fees.
The types of records requested may vary from one business to another but typically include:
- • Voided checks
- • Business licenses
- • Copies of business plans
- • Business owner credit scores
- • Inventory reports
- • Financial forecasts
While the merchant account application will provide a complete list of steps and necessary documentation, take care to answer the application’s details. The underwriters evaluate your responses based on their completeness, accuracy, and professionalism.
Review every line of your merchant account application before submission. Fill it out correctly and completely. Your complete and error-free application will be the ultimate test of your qualifications.
When Your Account Doesn’t Get Approved
Processors and underwriters view some business types as inherently more high-risk than others. These business types most often include gambling, e-cigarette and vape shops, adult entertainment, etc. These businesses pose a significant financial risk to payment processors because they are more likely to encounter chargebacks and fraud.
High-risk merchants may be required to furnish an upfront cash reserve or a rolling reserve that holds back a percentage of processing revenue for an interim period until you establish a stable transaction history. With some merchant accounts, until the business transaction history proves the stability and trustworthiness of the funds processed, processors will make the withdrawal of fees daily instead of the traditional monthly payment withdrawal.
Experience You Can Trust
Merchants will have better success receiving an acceptance letter the first time they apply for a merchant account with their due diligence to provide:
- Proper preparation of documentation presenting a viable business type
- Proof of good standing with previous merchant accounts
- Low chargeback history
- Sufficient volume history
- Established business experience
- A list of procedures in place to manage the security of your customer’s data
- Credible business policies and products and goods offered
We can guide you through this meticulous underwriting process and get you back to work. Our knowledgeable and experienced team will help you grow and scale your business regardless of your industry, size, or background as you more efficiently process payments with our robust catalog of options. Our flexible solutions allow you to accept ACH and credit card transactions on Day One within a single payment platform.
Schedule a call with us today for more resources and information about applying for a merchant account.
Date Originally Published: September 08, 2020
Date Updated: July 27, 2022
MORE TAGS:ISVs, Payment Processing, PCI Compliance, ACH Education, Payments Education, ISOs, Banking, Merchants, Independent Sales Organizations, Value Added Reseller