Merchant Underwriting: What is It?

February 4, 2023

There’s a lot that goes into setting up a merchant account. Of course, low-risk merchants might not perceive the process as being quite as tedious and frustrating. But if you’re a high-risk merchant, then the whole experience becomes exponentially difficult. And that’s all because of one thing — risk.

Merchant underwriting is one of the processes financial institutions use to determine how to fit a merchant to start taking payments and fulfill the financial obligations that come hand-in hand-with it. And while that might be a simplified definition, there’s way more involved that new merchants need to get familiar with to understand what they’re getting into fully.

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What is Merchant Underwriting?

So you’re looking to set up a merchant account. While it might seem like any other bank account, financial institutions carefully hand it out to just anyone. Unlike a standard deposit account which doesn’t involve much responsibility or risk, a merchant account calls for the cooperation of both the merchant and acquirer.


A merchant that cannot meet the financial obligations that come hand in hand with a merchant account inevitably places the burden of liability on the shoulders of their acquirer — and they don’t want that. So they ensure that before a merchant is approved, they carefully assess their ability and fitness to take on the responsibility of a merchant account. And that’s precisely what underwriting aims to achieve.

So what do they look into when they perform the underwriting process? Here are some factors that banks consider:

Background and Business Type

There’s a logical reason acquirers are interested in finding out more about your business type, and that has to do with risk. Some businesses are inevitably tied to a higher risk profile, which might be the first red flag for a conservative acquirer. Some high-risk businesses include:

Keep in mind that this isn’t an all-inclusive list. But generally, businesses more likely to experience chargebacks are lumped together as high risk. Banks try to avoid chargebacks because the process of reversing a transaction costs money on their end as well.

That’s why acquirers will impose steep fees on chargebacks to penalize merchants and to make them strive to provide customers and clients with quality products and services. Chargeback penalties can range from $20 to $100 per reversal, which may increase the chargebacks a merchant incurs.

For most acquirers, there’s a limit as to how many chargebacks they’ll allow. When a merchant breaches this number, the account is automatically shut down to protect the acquirer from further liability.


However, while most acquirers try to avoid partnering up with merchants in these high-risk industries, there are exceptions. For instance, the well-known CBD brand Holland & Barrett has been known to work with conservative acquirers that explicitly state in their terms that they do not work with CBD or hemp merchants.

The reason for that is that in exceptional cases, acquirers might be able to break their own rules, especially if the merchant signing up for an account can demonstrate a clean record of high transaction volumes with a limited chargeback history.

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Chargeback and Fraud History

A merchant’s history with other acquirers will also be considered during the underwriting process. They’ll mostly want to see how often the business experienced chargebacks and fraud. The more frequent these events appear in their history, the less appealing they’ll become in the eyes of the acquirer.

Remember that although chargebacks might happen often to high-risk merchants, low and moderate-risk merchants aren’t immune to them. A low-risk merchant with a high record of chargebacks and fraud might seem more dangerous to the perception of the acquirer.

This might indicate that the merchant engages in fraudulent activity that pushes most clients and customers to force payment reversals. And because acquirers don’t want that risk, they’ll often avoid working with merchants with a history of frequent chargebacks, even if they’re categorized as low risk.

Return and Refund Policy

Yes, banks care. Businesses that mainly ship out products become a higher risk because of the chances of non-delivery, lost packages, and receiving the wrong or incomplete orders. There’s also the fact that buyers can’t see or test the products before buying them, thus increasing the chances of returns if what they receive doesn’t match the expectations set forth by the business.


A merchant with a return and refund policy that’s more convenient for clients and customers will often have better chances of approval. By enacting regulations to resolve customers’ dissatisfaction without resorting to a chargeback, merchants can mitigate their risk and improve their appearance to acquirers.

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Card Payment Method

Generally, acquirers prefer businesses that take card payments in person. Why is that? Well, it’s harder to perform fraud when the card is right there. Even if a card is stolen, the fraudster would have to know the card-holders pin on top of having an identification card to verify that they own the card.

With card-not-present transactions, however, it becomes a whole lot easier. That’s because paying online purchases only requires the buyer to know the card information. The cardholder may enact a chargeback when someone performs a fraudulent transaction online.

Businesses that operate primarily online may need to show proof of security and fraud detection features that can help mitigate the risk and reduce the chances of these unauthorized transactions from pushing through.

Financial Capability

There are a lot of fees that are involved with operating and managing a merchant account. So before you sign up for one, your acquirer wants to know how capable you are of paying for those obligations.

During the underwriting process, they will ask for several documents that prove your financial capability. This can include your credit rating and bank statements. In many cases, your financial capability may be one of the most prominent determining factors of your merchant account approval.

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Why Underwriting is Important

So, what’s the importance of underwriting in the first place? Can’t an acquirer take your word for it? Well, where money is involved, banks and financial institutions will tread very carefully, considering their conservative nature. After all, no one wants to incur penalties and liabilities. But the underwriting process benefits both merchant and acquirer in numerous ways.

Benefits for Merchants

Underwriting can benefit merchants by setting the right limits for their business transactions. Depending on the conclusion that the underwriter comes to at the end of the process, you’ll set a limit on the transactions you expect.

If you set it too low, you might end up having your transactions impeded by constant restrictions placed on your account for breaching your limit. If set too high, then you might not be able to meet quotas.

A thorough underwriting process allows merchants to set the proper limits that reflect the volume of transactions they can realistically expect over a while.

Benefits for Acquirers

For merchant-acquiring banks, the benefit is that they get to stop fraudsters in their tracks. Don’t assume that everyone who tries to set up a merchant account has nothing but good intentions. Unfortunately, there are a lot of unscrupulous businesses out there that will open up merchant accounts for various (illegal reasons.)

They’ll go to great lengths to fake their business, including polished websites, pristine documentation, and even previous transaction history. One such case involved a merchant that opened several accounts with various acquirers to use stolen card information from hundreds of cards, allowing funds from unauthorized transactions to flow into their accounts without a hitch.

Another case involved a merchant that used their account to launder illicit funds acquired from illegal activities. Again, financial institutions don’t want to be part of these transactions and activities because it places their honest business neck-deep in liability.

So their underwriting process catches these potential threats in their tracks. This know-your-client process helps prevent unwanted partnerships and ensures that all those who engage in business with the acquirer abide by the same values and standards they uphold.

The Bottom Line

If you’re a high-risk merchant, then the underwriting process might seem like yet another strip of red tape on your way to approval. But there’s a logical reason for the scrutiny. Providing benefits for both merchant and acquirer, the underwriting process is the first step in developing a relationship of trust and transparency with your acquirer.

So as long as you’re a clean business with good intentions and sufficient documentation, there shouldn’t be anything to worry about. The underwriting process is an essential step of the application and may serve to protect your business in the long run.

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