Underwriting is the process of due diligence and risk analysis that payment processors use to ensure new merchants are trustworthy, capable, and safe to work with. Every time a credit card transaction is processed, financial risk exists, and good underwriting minimizes the chances of that risk causing damage to anyone involved in processing the payment

For instance, if a shady merchant runs off without delivering on their promises, who is responsible for refunding the buyer? Likewise, if a well-meaning merchant goes out of business before delivering the goods or services it has sold, the buyer is due a refund, but the bankrupt merchant won’t be able to cover it. 

In both situations, the payment processor that handled the transaction is ultimately responsible for returning funds to the buyer in the case of fraud or failure to deliver. The card companies will always side with the customer in cases where the merchant is legitimately at fault, so, naturally, payment processors have a vested interest in working with the most trustworthy, stable merchants possible in order to avoid paying for a merchant’s mistakes out of pocket. Underwriting allows them to do that by examining each merchant under a microscope and applying a wide variety of tests to ensure any potential risk is identified upfront so the processor can make an informed approval decision. 


Who Performs Merchant Underwriting?

Merchant underwriting is performed by whichever party agrees to take on liability for the risk involved in transaction processing. Generally speaking, that is the payment processor. When an independent sales organization (ISO) sends a new merchant application to a payment processor, the processor’s underwriting department handles 100% of the risk assessment. 

However, in some cases, large ISOs agree to take on part of the liability in exchange for a larger residual percentage. Those ISOs — known as wholesale ISOs — subsequently also take on part of the underwriting process, either doing their own due diligence in parallel to the processor or splitting up the process based on each party’s share of the liability. 


What Kind of Risks Does the Underwriting Process Analyze?

While each processor or wholesale ISO will have its own unique underwriting process, there are certain types of information that are examined universally at an absolute minimum, covering:

  • The type of business the merchant operates
  • How long the company has been in business
  • Any struggles with chargebacks in the past
  • The credit history of the owners
  • The sales volume the company is looking to do

Business Type

Not all industries are created equal, and some represent more risk than others. Most retailers, including restauranteurs, are considered low risk and are easier to underwrite. On the other hand, certain types of businesses like alternative healthcare or “make money online” products may be so risky that they’re extremely difficult if not impossible to underwrite due to a high percentage of fly-by-night operators.  

Business Longevity

In business, one of the best indicators of a stable future is a stable past, so underwriters put a lot of weight on how long a new applicant has successfully been in business. A brand new merchant applying for their first merchant account is a lot riskier than a merchant with years of history running a profitable, trustworthy business, and payment processors will price (or make denial decisions) accordingly. Generally speaking, most processors are looking for at least two to three years of business history, and anything less may result in higher transaction fee rates or even outright denial. 

Chargeback History

Chargebacks are an inevitable part of business, but they can be extremely costly, so when they start to creep up too often, it’s a big red flag. First and foremost, a history of chargeback problems can indicate that a business is failing to live up to its end of the sales process. Alternately, too many chargebacks can also indicate that a business isn’t protecting itself well against fraud and dispute abuse. In either case, the more chargebacks a merchant has on their record, the more risk they represent. 

Owner Credit History

A business and its owners are inextricably linked, and that’s especially true when it comes to small owner-operated businesses. Underwriters manage the risk owners represent by looking closely into each one’s credit history. Anything that would set off alarm bells in any other credit application — like a loan or mortgage — will also catch the eye of payment processing underwriters and may result in a request for more information, a higher rate, or outright denial. 

Sales Volume

Sales volume is an important factor in underwriting because it reflects the amount of damage a new merchant can potentially do. For instance, a mom-and-pop shop applying to do a few thousand dollars in sales each month can only hang so much liability on a processor compared to a Lamborghini dealer selling $250,000 cars. The greater the sales volume a merchant is applying for, the more risk they represent, and the more the other underwriting categories mentioned will need to return exemplary results. 


How Does the Merchant Underwriting Process Work?

Underwriting is based largely on the information a merchant provides in their merchant processing agreement (MPA). Because the information in an MPA drives the process, it’s extremely important that independent sales organizations are diligent in their onboarding processes to ensure underwriters get the data they need. Once an MPA reaches an underwriting department, the staff can use the data in two primary ways: manual underwriting that requires a human underwriter to perform the necessary checks, or automated underwriting that uses specially designed software tools to make everything faster, easier, and more consistent. 

Manual Underwriting

In the manual underwriting process, a member of the underwriting team hand-checks each individual merchant application, verifying information and assessing the risk based on internal tables and scoring systems. Manual underwriting is common but has some very significant drawbacks that make it unfavorable. The biggest problem is that manual due diligence is extremely time-consuming and repetitive, which means in some cases, human underwriters don’t perform the entire process before making a decision on the merchant. Inconsistency leads to unreliable decisions, making manual underwriting ineffective and potentially costly. 

Automated Underwriting

Automated underwriting pulls the data from a merchant’s application directly into third-party risk assessment tools that perform dozens of checks instantly and automatically. Automated underwriting tools examine all the same common factors discussed earlier, but also perform far more advanced checks using large databases covering everything from government sanctions lists to law enforcement lists and beyond. Some tools, like Conformance Technologies PreComm Toolkit, can perform as many as 70 or more checks on a merchant in a matter of minutes, using artificial intelligence and machine learning to ensure the most thorough and accurate results possible every time the underwriting process is run. The consistency automated tools offer can’t be matched by manual processes, making automated underwriting an extremely valuable risk mitigation and management tool.  


Automated underwriting is beneficial for payment processors, but it’s especially important for wholesale ISOs who may not have large underwriting departments and need to maximize efficiency and resource management while ensuring the best possible due diligence on each merchant. By far, the best solution for wholesale ISOs is to integrate the underwriting process directly into their customer resource management (CRM) tools — an integration offered by IRIS CRM thanks to a partnership with Conformance Technologies. 

To find out more about how IRIS CRM and Conformance Technologies can automate your wholesale ISO’s underwriting process, schedule a free guided demonstration of IRIS CRM today.