Underwriting is the process by which a payment processor or acquiring bank evaluates the risk of establishing a merchant account with a particular business. This includes assessing the potential for fraud, chargebacks, and the financial stability of the business.
Based on this assessment, the processor or bank decides whether to approve the merchant account application and under what terms. The underwriting process typically involves a thorough review of the merchant’s business model, financial statements, credit history, and past processing history.
The processor or bank may also consider the type of products or services the merchant offers, the average transaction size, and the expected monthly volume.
High-risk businesses, such as those in industries with a high incidence of fraud or chargebacks, may face more stringent underwriting requirements and may be required to pay higher fees or provide additional collateral.
Ultimately, the underwriting process helps the processor or bank to make an informed decision about the level of risk associated with the merchant and to set appropriate terms and conditions for the merchant account.