Let’s start off with risk, which is defined as a situation involving exposure to danger (book on history of risk – amazon link). Credit card processors (or merchant service providers) have the situation involving exposure to losing the credit card funds used at a merchant. Some merchants do $20,000/year in credit card sales, some do $200 million/year. The higher the credit card processing amount, the more the exposure there is for credit card processors.
Merchants with different products, billing cycles, industries, and business stages have different risk levels, resulting in higher fees to offset the risk. You can read why some merchants pay higher fees.
Underwriting is the process which an organization accepts liability and therefore guarantees payment in case loss or damage. The word “underwriter” comes from the practice of having the risk-takers write their name under the total amount of risk they are willing to accept. Underwriting occurs in many industries: insurance, banking loans, mortgages, etc.
The underwriting process by merchant account providers and payment processors is about collecting information. These are the main things they will look into:
- Business type: what products and services are sold and to whom
- Years in business: the longer in business means less risk (2+ is good)
- Chargeback history: has there been past issues with chargebacks (ie. higher than 1% rate)
- Billing method: do you charge quarterly or annually (the shorter the better)
- Business owner credit score: the higher the credit score, the better
- Requested sales volume: higher volume means higher risk
Getting a merchant account may sound like a difficult process, but in fact it is very streamlined. Good merchant providers can normally do all this and get you approved in less than one day. It’s well worth it to get this done and approved at the start of your business than while you’re up and running. It gives you the ability to start building a credit history quickly so you have more financing options for the future.