How Does A Merchant Account Provider Evaluate Risk?

Evaluating risk depends on the requirements of the bank or financial institution that will be processing your transactions. Below is a list of items that most banks or institutions consider when underwriting any business for a merchant account.

Industry – There are many different categories of industry and each industry is evaluated by a merchant account underwriter for perceived risk. The following examples can help give an idea of which risk category a business may fall under and it is important to know that an application can be rejected during the Underwriting process specifically based on the industry that a business falls under regardless of other factors on the application.Some businesses that are extremely difficult to underwrite for include many online auction websites, online pharmacies, online gun stores, businesses involved in tourism, businesses who sell health and nutrition supplements or businesses who sell products with broad health claims.Please check the Prohibited Merchant/Prohibited Substance List if there are any doubts on what will be accepted.

Low Risk Merchant Accounts – These businesses are typically restaurants and retail businesses.

Medium Risk Merchant Accounts – website or retail stores that sell health and beauty products, telecommunication and utility services, lawyer offices and political organizations.

Higher Risk Merchant Accounts– gyms, insurance agencies, handmade apparel and jewelry, charities, businesses who have monthly memberships or subscription-based services, web development or gaming development businesses

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Underwriting Factors

Longevity – The longevity of a business can make a difference in merchant account underwriting. The best scenario is a business that has been in business for five years or more. They typically have an established customer base with a steady flow of cash. This is important to a merchant account provider as it means that a business can effectively respond to the unexpected, like chargebacks fees. Longevity may also mean that the business is considered lower risk.

Chargeback history – Chargeback history will most definitely be taken into account. High chargeback rates are considered a huge risk as almost everybody loses money on the transaction.

Billing Procedures – Many merchant account underwriters will analyze billing procedures to access the cash flow risk. If a business bills in advance before products and/or services are produced, then a merchant account underwriter will consider it higher risk. This is due to situations changing and services or products not being used or needed by the customer. If this happens frequently, then chargeback rates are going to be much higher and a high chargeback history puts you in a higher risk category.

Business Owner Credit Score – As with most purchases for loans, a bad credit score will have an impact on the merchant account application process. If a merchant has poor credit, then we should consider submitting financial statements instead of or to accompany the credit score. If a business has multiple partners with great credit scores, then it is recommended that they fill out the application for a merchant account.

Transaction Volumes – Transaction volumes are one of the most important factors when it comes to merchant account underwriting. It isn’t uncommon for brand new businesses to have a smaller volume processing cap until their business model is proven successful. That cap will be increased when there is proven business stability.

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What Information is Needed for a Merchant Account Activation?

Required

  • Information about the business (DBA, Address, Monthly Volume, Avg Ticket, etc)

  • How the business is set up (Sole Proprietorship, Corporation, LLC, etc) along with accompanying contact information and Federal Tax ID#

  • Personal Information for the signer of the account (Name, Home Address, SSN, Contact Information)

  • Copy of a voided check/bank letter with the following business information:
    DBA or Legal Name
    Account Number
    Routing Number

Possible Additional Information

  • Most recent tax returns

  • Most recent financial statements

  • Most recent bank statements

  • Most recent credit card processing statements

  • Copy of a driver’s license, passport or SS4

  • ITIN Letter – to support the Individual Taxpayer Identification Number that is used in place of an SSN.

  • FFL – A Federal Firearms License (FFL) is a license in the United States that enables an individual or a company to engage in a business pertaining to the manufacture or importation of firearms and ammunition, or the interstate and intrastate sale of firearms.

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Special Situations for Approval

There are many unique situations that an underwriter must consider when working through a merchant account application. Sometimes these unique situations can still be approved for a merchant account if a few adjustments are made in how the money is processed.

Upfront reserves – you may receive approval for a merchant account if the merchant agrees to a situation known as an upfront reserve. The merchant account payment processor will hold onto a designated amount upfront to mitigate some of the risk until the merchant can prove reliability. This tends to happen only on very high-risk accounts.

Holds – the processor will require a certain amount of funds to be withheld per transaction until the merchant can prove reliability. This tends to happen only on very high-risk accounts.

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Top Reasons for a Pended Deal

Accounts may be pended for a number of reasons, including the following:

  • Missing Information - Simply, first and foremost, a merchant application will be pended because of missing information.  Ensure that the MPA is completed in its entirety. 

  • Signatures - Echoing the first bullet point, make sure that all necessary signatures are received.  A Personal Guarantor signature is required for a Sole Proprietorship but can be avoided for other Ownership types with the provision of 3 recent months Bank Statements.

  • Social Security Numbers - Social Security Numbers are requested for all applications and are required for Sole Proprietorships.  Other ownership types can provide financials (Balance Sheet and Profit & Loss) or a Dun & Bradstreet number in lieu of the signer’s SSN being provided. 

  • Individual Taxpayer Identification Number – If the merchant is using an ITIN rather than their Social Security Number then have a copy their ITIN letter, tax returns and passport included with the submission of the merchant application.

  • Federal Tax ID - Federal Tax ID numbers are required for Corporations, LLC’s or otherwise.  Be sure the TIN matches that of their W9 and/or the IRS database to avoid pending your deal as well as any backup withholding when validation of the TIN is completed.

  • Legal Name - Businesses and their affiliated Legal Names are checked against the Secretary Of State’s website in which they have filed to confirm validity. 

  • Banking Information – Voided Checks must have the Legal or DBA name preprinted if the account is not a Sole Proprietorship.  If the merchant does not have checks or a failed response on the GIACT report comes back on the verification of the information provided, then a bank letter is required.  The letter must be printed on the bank’s letterhead advising the account is open and in good standing and signed & dated by an officer of the bank. 

  • Monthly Bankcard Sales – The Card Not Present Addendum must be completed if more than 20% of the transactions are not swiped.  Recent bank statements and/or previous processing statements may be required to support higher volume and higher ticker requests.  (See the Credit Policy for those limitations). 

  • E-Commerce – If processing online, then the aforementioned Card Not Present Addendum must be completed and the merchant’s website must be compliant and contain the following: privacy policy, refund policy, terms & conditions and checkout.

  • Equipment Type – Confirm and select the equipment needed when submitting your merchant application.  Reach out to the PRM/Support team with any questions prior to boarding.

  • Multiple Ownership – Personal information is required for all business with multiple owners and that can be provided on the merchant application and/or the beneficial ownership form.  Only one signature is required if the signer holds more than 50% or more ownership but if all signers are less than 50%, then signatures for all parties are required. 

  • Business Validation – If the business cannot be verified then a Business License, Utility Bill, Sales Tax License or Lease Agreement, Acceptable Marketing Material (Yellow Page Add, Google Listing, etc.) will be requested.  If pressed further, then a Site Inspection could be ordered.

  • Additional Information/Paperwork – If ordering specific equipment such as Clover, be sure to complete and provide the necessary Addendum and Equipment Order Form.Petroleum merchants requesting Fleet Cards must have the appropriate Voyager and Wright Express paperwork/information completed.

Underwriting has the freedom to decline any deal for any of the following reasons:

  • Open Bankruptcies or derogatory credit activity

  • Listing found on MATCH (Member Alert to Control High-Risk) inquiry

  • Listing found on OFAC (Office of Foreign Asset Control) inquiry

  • Background Search, on Legal, DBA & Owners/Signors, for any derogatory findings (i.e. criminal and regulatory investigations/settlements, judgments, open suits, etc.).

  • If they are a Prohibited Merchant Type or sell any one of the listed Prohibited Substances (see Credit Policy)

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Additional Information

Underwriting has the freedom to decline any deal for any of the following reasons:

  • Open Bankruptcies or derogatory credit activity

  • Listing found on MATCH (Member Alert to Control High-Risk) inquiry

  • Listing found on OFAC (Office of Foreign Asset Control) inquiry

  • Background Search, on Legal, DBA & Owners/Signors, for any derogatory findings (i.e. criminal and regulatory investigations/settlements, judgments, open suits, etc.).

  • If they are a Prohibited Merchant Type or sell any one of the listed Prohibited Substances (see Credit Policy)

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