How to prepare your business for merchant underwriting

Merchant underwriting is the process conducted by financial institutions (banks, payment processors, and fintech companies) before granting businesses the ability to accept electronic and credit card payments. This assessment serves as a protective barrier against fraud, chargebacks, and other financial risks, making it an essential step for any business seeking to process card transactions.

Understanding merchant underwriting

Merchant underwriting is a risk management process that evaluates whether your business demonstrates the financial stability, regulatory compliance, and trustworthiness necessary to handle card payments securely. The process helps:

• Protect the payments ecosystem from fraudulent activities
• Reduce the likelihood of excessive chargebacks
• Safeguard consumers from unauthorized transactions
• Ensure compliance with industry regulations and standards
• Minimize potential financial losses for all parties involved

The time it takes to complete merchant underwriting varies depending on your business's complexity and how quickly you submit required information. While it can take up to a week, some financial facilitators can complete the process much faster.

Once underwriting is complete and your business is approved, the payment provider or acquiring bank will open a merchant account, enabling you to accept customer payments.

Merchant underwriting terms and definitions

Financial facilitator: A financial facilitator is an organization that helps businesses process payments. They typically provide merchant services such as credit card processing, payment gateway setup, and fraud prevention tools.

Merchant: A merchant is a business that processes customer payments. This can include online stores, brick-and-mortar businesses, and service providers.

Merchant account: A merchant account is an account set up by the financial facilitator to enable businesses to accept customer credit card payments.

Merchant agreement: A merchant agreement is a document that outlines the terms and conditions of your relationship with the financial facilitator. In addition, it includes information such as fees, chargeback limits, and dispute resolution.

EDI payments: EDI (Electronic Data Interchange) payments are digital transactions that use a secure payment gateway to transfer funds between businesses.

Financial profile: A financial profile is an assessment of your business's financial health. It includes information such as credit history, cash flow, and current liabilities.

Chargeback fees: Chargeback fees are fees merchants must pay when a customer disputes a transaction. This is usually caused by credit card fraud or unauthorized card use but can also be due to customer dissatisfaction.

Operational history: An operational history includes information about how long you've been in business, the type of products or services you offer, and your past performance records.

Risk assessment: A risk assessment evaluates your business's potential risks, such as fraud or insolvency. It helps the financial facilitator determine if your business meets its standards for accepting payments.

Key factors in the merchant underwriting process

Factors examined in your underwriting evaluation include:

Credit history

Credit history is one of the most significant underwriting factors. A business’s credit score reflects its financial reliability and ability to manage business debt. Underwriters use this data to assess the likelihood that the business will default on its payments or engage in fraudulent activity.

• What they look for: Payment history, outstanding debt, and previous bankruptcies
• Example: A business with a high credit score is more likely to receive favorable terms, while one with a low score may face higher fees or rejection

Transaction volume

This indicates the scale at which a business operates. Underwriters assess both the total number of transactions and the value of those transactions to gauge the risk. Higher volumes can indicate a stable business, but they also come with increased risk if the business is unable to handle large financial flows.

• What they look for: Monthly, quarterly, and annual transaction volume
• Example: A new e-commerce business may start with modest transaction volumes but will need to prove its ability to scale safely before being approved for a larger merchant account

Chargeback history

Chargeback history reflects how often customers dispute transactions or request refunds. A high chargeback rate is a red flag for underwriters, as it suggests the business may have a poor reputation or could be susceptible to fraud.

• What they look for: Chargeback volume, chargeback ratio, and the reasons for disputes, such as fraud or customer dissatisfaction
• Example: An online retailer with a history of high chargebacks may face higher processing fees or be told to take preventive measures, such as adopting fraud detection systems, to mitigate risk

Business model

The business model describes how a company makes money. Underwriters consider whether the business is involved in industries known for higher risks, such as adult entertainment, gambling, or telemarketing. These high-risk industries are often scrutinized more rigorously due to a higher likelihood of fraud, chargebacks, and regulatory concerns.

• What they look for: Type of products sold, industry standards, and regulatory compliance
• Example: An online gambling business may face stricter underwriting due to increased fraud and chargeback risks, requiring additional documentation or guarantees

Risk profile

A business's risk profile is a comprehensive assessment that combines multiple factors, such as credit history, chargeback history, transaction volume, and the business’s industry. This profile helps determine whether the business poses a higher risk for fraud, chargebacks, or financial instability. Businesses with a higher risk profile will often face higher fees or stricter approval requirements.

• What they look for: A combination of creditworthiness, industry risks, and past performance
• Example: A new e-commerce store with a high-risk industry and limited credit history may be considered a higher-risk merchant, resulting in a more stringent underwriting process

Financial statements

These help underwriters assess the company’s overall financial health. They include balance sheets, profit and loss statements, and cash flow statements.

• What they look for: Profitability, liquidity, and cash flow stability
• Example: A business with positive cash flow and a healthy balance sheet is more likely to be approved; one with negative cash flow may raise concerns about its ability to meet obligations

Bank statements

Underwriters often request bank statements to verify the business’s financial status and ensure that funds are available for processing payments. These documents help underwriters confirm the business’s transaction volume, account balances, and any irregular activity.

• What they look for: Consistent deposits, adequate reserves, and account stability
• Example: A business with volatile bank account balances may prompt questions about whether it can manage transactions smoothly, resulting in higher scrutiny during the underwriting process

Risk management systems

Businesses with well-established risk management protocols are more likely to be approved. These systems, such as fraud detection tools, help prevent issues such as chargebacks and fraud.

• What they look for: Implementation of fraud prevention systems, secure payment gateways, and anti-fraud measures
• Example: Underwriters may view a business that uses a payment facilitator to handle sensitive transactions securely and offers chargeback prevention tools more favorably

Compliance with regulatory requirements

Certain businesses must comply with specific regulations, such as anti-money laundering (AML) and know your customer (KYC) requirements. Underwriters review compliance to ensure businesses are legally compliant and not involved in illegal activities.

• What they look for: KYC and AML compliance, adherence to industry-specific regulations
• Example: A business in the financial services industry that doesn't comply with AML regulations might be rejected outright, while one that is fully compliant is more likely to be approved

Common merchant underwriting challenges

Traditional merchant underwriting can be slow and complex, which can be frustrating for your business. Some common challenges you might face include:

• Complex documentation: Underwriters require a lot of documentation, including financial statements, bank statements, and evidence of fraud prevention measures, which can be overwhelming for new merchants
• Slow approval times: Manual underwriting processes can take weeks, delaying the business’s ability to start processing payments
• Lack of transparency: Sometimes businesses are unsure why they were denied or why they have to pay higher fees

How automation is changing merchant underwriting

Automation and AI are revolutionizing merchant underwriting, transforming a paperwork-heavy ordeal into a streamlined digital process. Digital verification systems now authenticate your business information and financial statements within minutes instead of days. This moves you from application to approval significantly faster.

AI-powered risk assessment tools analyze thousands of data points from your transaction history and industry benchmarks to create accurate risk profiles in real-time. Unlike traditional methods, these systems evaluate your specific business circumstances, often resulting in more favorable terms for merchants who might have been unfairly penalized based solely on their industry.

Machine learning algorithms continuously monitor transaction patterns, identifying suspicious activities before they impact your business. These systems distinguish between legitimate customer behavior and potential fraud with remarkable accuracy, reducing false positives while still protecting you from actual fraud threats and maintaining your merchant account standing.

How to prepare for merchant underwriting

1. Organize your financial documentation: Gather your bank statements from the last 6 months, prepare current balance sheets and income statements, and verify your business credit score. Underwriters scrutinize your debt-to-income ratio and look for consistent revenue growth quarter-over-quarter. For seasonal businesses, prepare year-over-year comparisons to demonstrate stability despite cyclical fluctuations.
2. Minimize your chargeback profile: Implement detailed refund policies with clear timeframes, improve product descriptions with accurate shipping estimates, and establish address verification systems (AVS) for all transactions. Document your recent chargeback resolution efforts and maintain records showing dispute win rates. Underwriters typically flag applications with chargeback rates exceeding 1%, so prioritize bringing your numbers below this critical threshold.
3. Calculate your true processing costs: Request comprehensive fee schedules including interchange rates, assessment fees, authorization fees, and monthly minimums. Analyze how your average transaction size impacts your effective rate—smaller transactions often cost proportionally more to process. Many merchants overlook batch closing fees and gateway costs that can add hundreds in monthly overhead.
4. Leverage industry expertise: Partner with payment facilitators or ISOs experienced in your specific business sector. For example, restaurants benefit from processors familiar with high-volume, low-ticket transactions, while subscription businesses need experts in recurring billing models. These specialists can guide you through specific compliance requirements like PCI-DSS for e-commerce or EMV standards for in-person transactions.

Simplify your merchant onboarding with Ramp

Managing merchant accounts and ensuring smooth payment processing is key to running a successful business. By streamlining the merchant underwriting process and reducing risk, you can focus on growing your business while maintaining secure, efficient payment systems.

Ramp’s procurement solutions help you centralize and manage payment systems, reducing complexity and saving time. With features that automate integrations and vendor management, your team can make smarter financial decisions and cut unnecessary costs.

Explore how Ramp’s vendor management platform can help you simplify your merchant onboarding process and optimize payment processing for your business.