Behind every successful online transaction lies a risk mitigation framework that ensures the stability of the financial system at large, and it’s called: merchant underwriting. Merchant underwriting is an essential process in the payments space, that every merchant undergoes before they can accept electronic payments.
As a software company interested in embedding payments into your software platform for your users to take advantage of, understanding this mandatory milestone for your customers is critical, as is selecting a strategic and innovative Embedded Payments partner that will help guide you through this often arduous process.
Throughout this blog, we explore what merchant underwriting is, why it’s important, and the five factors that contribute to this essential risk mitigation process.
What is merchant underwriting?
Merchant underwriting is the evaluation and assessment of a business looking to accept card payments or other forms of electronic payments. The goal of underwriting is to verify the validity and stability of the merchant and their business model and intention before they can begin processing payments online to avoid financial risks and fraud and ensure regulatory compliance.
Before a merchant can accept payments online, they will need a merchant account, which requires them to complete a merchant account application and undergo underwriting with a payment processor (for example: Worldpay) or payment facilitator, also known as PayFac®. We will touch more on those nuances later in this blog.
Why is merchant underwriting important?
Merchant underwriting is important because it helps verify that merchants are legitimate, have a solid financial foundation, and adhere to necessary risk policies. The process assesses a business’s eligibility to accept payments and ensures they are processed through the merchant account securely and smoothly.
How does the merchant underwriting process work?
The merchant underwriting process will depend on your payment processor or payment facilitator. For example: if you’re working directly with a payment processor, like Worldpay through a partnership with Payrix, our team will review your merchants’ applications and risk profiles thoroughly and comprehensively. The time it takes to receive approval varies and depends on a few key factors, which we will touch on here in a moment.
The industry standard for merchant underwriting can take several days to weeks and requires significant documentation, however, for our Payrix partners, we leverage innovative technology, machine-learning, and automation to further streamline the underwriting process, alleviating the pains often associated with the merchant boarding experience. Our unique process speeds time-to-revenue and eliminates the number of fields a merchant needs to fill out to apply for merchant payment services, allowing them to receive an underwriting decision and begin transacting with you and your platform within minutes.
Five key factors that can affect merchant underwriting
The merchant underwriting framework was designed to help fortify the payment ecosystem and avoid exposure to legal liability and business risk for all involved stakeholders, including you, your payment processor or payment facilitator, your customers, their cardholders, vendors, and more. Therefore, these are the five key focus areas that your payment processor or PayFac will likely narrow in on during the merchant underwriting process.
- Types of products/services offered by the merchant. The products or services sold by the merchant can affect their underwriting risk profile. Services should be well-defined and specific to avoid potential red flags.
- Transaction volume and size. Unexplained high sales could raise a red flag to an underwriter, particularly if the merchant is small. The risk this scenario traditionally presents is excessive chargebacks. A chargeback is a refund that is returned to a card after a customer disputes a transaction that may be fraudulent or didn’t meet expectations. In addition to transaction volume, underwriters may also assess the industry and size of transaction. For example, large and consistent transactions for a law firm would be considered low risk, whereas several small transactions at this business could be indicative of card testing.
- Billing and credit policies. Generally, underwriters prefer merchants that bill customers after services are completed and have shorter credit cycles (for example: 60 days or less).
- Industry and inherited risk. Certain industries, including gambling, cannabis, or firearms are considered high-risk and may lead to rejections or conditional approvals with high fees.
- Chargeback volume. Underwriters will generally ask to review the chargeback history of the merchant. A high chargeback rate may signify to the underwriter that the merchant is selling a poor product or service or there are ineffective fraud management frameworks in place.
When it comes to merchant underwriting, a strategic Embedded Payments partner can make all the difference for you and your customers.
Merchant underwriting can feel like a daunting endeavor, but it doesn’t have to be with the right Embedded Payments partner.
At Payrix and Worldpay, we make the process feel more approachable, with helpful guidance, legacy underwriting expertise, and transparent communication for you and your software customers. Regardless of what payments model you choose: referral payments, PayFac-as-a-Service, or PayFac, Payrix and Worldpay will guide you through the process and help you set clear expectations for your merchants when it comes to underwriting, application documentation, and beyond.
For software companies that select a referral payments model, Worldpay, as the payment processor, manages your merchants’ underwriting experience, removing all points of friction. For software companies that opt to become a PayFac, you’d inherit the responsibility to underwrite your merchants and absorb any potential risks or liabilities. This is not an endeavor you’d have to go at alone, our team is here to help you navigate these new waters. Software companies that move forward with PayFac-as-a-Service (or Payrix), can choose the level of risk they feel comfortable taking on and Worldpay absorbs the rest.
Our team of dedicated experts is here to help you learn more about the merchant underwriting process, the impacts on your business, select a payments model, and more. If you’re interested in learning more about Embedded Payments and what to look for in a payments partner on your own time, check out our Complete Guide to Embedded Payments.
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