High-risk merchant accounts allow businesses in industries like gaming, travel, and eCommerce to process payments where traditional processors may decline. But behind the scenes, securing one isn’t as simple as filling out an application. The underwriting process plays a vital role, especially when it comes to evaluating the risks associated with high-risk merchant account.
Here’s a breakdown of how underwriting works for businesses operating in high-risk industries:
What is Underwriting for Merchant Accounts?
Underwriting is the process that payment processors or acquiring banks use to assess a business’s risk level. For high-risk merchants, the goal of underwriting is to ensure both compliance with industry regulations and to minimize the financial risk posed by things like chargebacks or fraud. Simply put, underwriting helps decide whether a business can be approved for a merchant account and under what terms.
The Steps in the Underwriting Process
To better understand how underwriting works for high-risk merchant accounts, consider these key steps:
1. Business Evaluation
One of the first things underwriters will look at is the business in question. This involves analyzing the industry, the products or services being offered, and the company’s operational model. High-risk industries, such as adult entertainment, CBD sales, or cryptocurrencies, often raise red flags due to their higher exposure to fraud, disputes, and regulatory challenges.
2. Financial Review
Underwriters will often request financial documentation such as bank statements, profit and loss reports, and credit scores. These documents help assess whether the business is financially stable and able to handle potential chargebacks or fraud-related issues.
A key marker here is the chargeback ratio (the percentage of monthly transactions customers dispute). For high-risk merchants, a chargeback ratio above 1% can cause account denials or even account terminations over time.
3. Sales and Marketing Strategies
How a business markets its products can also influence the decision-making process. Unethical advertising practices or misleading promotions can raise red flags. For example, aggressive advertising for subscription-based products without clear cancellation policies can be a concern for banks or processors.
4. Processing History
For businesses that have accepted payments in the past, the underwriting process may consider previous processing statements. A history of chargebacks, irregular transaction patterns, or sudden volume spikes could paint the business as high risk. Stable and consistent transaction data, on the other hand, may reassure the underwriter.
5. Legal and Compliance Checks
Compliance with regulations is a non-negotiable step during underwriting. Businesses must ensure they comply with local laws governing their industry. High-risk businesses must also handle anti-money laundering (AML) protocols and Know Your Customer (KYC) practices appropriately.
Furthermore, underwriters may verify licenses or certifications required for specific high-risk industries, ensuring the merchant operates within legal boundaries.
6. Customized Terms and Costs
Once the risk profile has been assessed, the underwriter assigns terms to the merchant account. For high-risk accounts, this usually includes higher processing fees, reserve requirements (where a portion of funds is withheld as a security buffer), or rolling reserves held over a specified period.
While these terms may seem restrictive, they’re designed to protect the payment processor or acquiring bank from financial loss while still offering businesses the flexibility they need to operate.
Why Underwriting Matters for High-Risk Merchants
For high-risk businesses, underwriting is more than just a necessary hurdle; it’s protection against approval in an unsuitable payment ecosystem. An in-depth underwriting process ensures that the payment processor can offer stable services without the business being flagged or dropped due to increased disputes or risks over time.
High-risk merchants also benefit from tailored solutions based on their business model. While costs may be higher, these accounts often come with streamlined fraud prevention tools and chargeback management systems to keep risks under control.
Understanding underwriting ensures smoother applications and enables businesses to proactively meet compliance milestones. A well-prepared merchant is not just easier to approve but is also likely to secure better terms during negotiations with payment processors.