Merchant Underwriting 

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Merchant Underwriting

Merchant Underwriting Basics

Merchant UnderwritingMerchant underwriting is a critical process for any Acquiring Bank or Financial institution. Banks should take extreme care in underwriting any merchant. The level of the scrutiny should be more or similar to what they use while offering loans and funding. Different challenges can appear if the underwriting process is not correct. That is why the financial institutions should ensure that the merchant has a good business standing. Merchant must be capable of overcoming the challenges of future that may include chargebacks, disputes, Bankruptcy, and refunds. Merchant underwriting involves checking and analyzing multiple factors, and here few of them are listed.

Factors Affecting Merchant Underwriting.

  • The acquiring team, underwriting team, and the risk team should ensure that the merchant is from an industry that is acceptable. Any business that is not a part of an approved sector as per the bank’s policy should be straight ahead declined.
  • Location of the merchant. Acquiring banks and Payments service providers have set rules as per the locations that are approved. Merchants from places that are not served by the Bank as per the policy are ignored or rejected.
  • Chargeback Analysis. If the merchant has a processing history, then the chargeback ratio must be analyzed. A merchant with high chargeback ratio with a previous processor can attract massive risk on the processing institutions financial infrastructure.
  • Merchants that are considered high risk should be subject to even more scrutiny.
  • P&L Statement also known as the profit and loss statement. The merchant underwriting team should deeply analyze the Profit and loss statement of the merchant for previous years. This statement should ideally be created and audited by a third party auditor and not from the merchant or his team members.
  • An SOP or standard operating procedure for underwriting of merchants. Financial Institutions should have proper SOP in place for merchant account underwriting. It should be in documented form and should be readily available for reference to the risk and underwriting team members.
  • Adequate Information. Financial Institutions should add multiple fields in the application form to get the maximum information required to evaluate the merchant in a better way.
  • The legal team, risk team, Underwriting team of the financial institution should work hand in hand to draft an extensive merchant account acquiring agreement. The merchant account acquiring Institution or the financial institution should add all the clauses that are required to protect the interest of acquiring institution from a legal point of view. The agreement should also shift liabilities to the merchant if needed.
  • Addendum to the agreement. In case of any addition of clauses to the merchant account agreement. The acquiring institution should get a signed acknowledgment from the merchant on the addendum to the contract.
  • Regular and Surprise Audits. The financial institution should also ensure to have a process of regularly auditing the account after approval. It may also include randomly checking the processing history of the merchant and identifying the risk level. Most white-label payment gateways show some risk notifications on the dashboard. In case if it appears that the risk is increasing than adequate risk mitigation steps should be implemented.

Our team will be happy to suggest you best options for ach payment processing. We are proud to be partners with few topnotch card and ach processing companies in the world. Send us an email on [email protected].

Disclaimer:- We are not merchant account acquiring experts. The information on our website may have errors and should never be considered accurate. For the most precise information kindly contact any registered financial institution or Acquiring Bank.

Suggested Reading

https://www.occ.treas.gov/publications/publications-by-type/comptrollers-handbook/merchant-processing/pub-ch-merchant-processing.pdf

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