Main / Learn / 
What Is Merchant Underwriting

What Is Merchant Underwriting

Merchant underwriting assesses a business’s risk, stability, and compliance before approving it for credit card payment processing.

Merchant underwriting is the risk assessment process that payment processors and acquiring banks use to evaluate a business before approving it for a merchant account. This process helps determine whether a business is financially stable, legally compliant, and trustworthy enough to process credit card payments. 

Underwriting typically involves reviewing various aspects of the merchant’s business, such as the industry type, business model, transaction history, average ticket size, processing volume, financial statements, credit scores, website compliance, and even refund and privacy policies. High-risk businesses, those prone to chargebacks, fraud, or regulatory scrutiny, undergo more rigorous underwriting procedures. 

For example, companies in industries like travel, adult entertainment, supplements, or CBD sales may need to provide additional documentation or agree to terms like rolling reserves or higher processing fees. The goal of underwriting is to mitigate potential losses for the payment provider and ensure compliance with card network rules and regulations. 

With the rise of digital commerce, many modern payment providers have streamlined this process through automated underwriting tools that use AI and data analytics to quickly verify identity, evaluate risk factors, and onboard merchants faster, while still maintaining strong risk controls.

Factors that Affect the Merchant Underwriting Process

The merchant underwriting process is influenced by several factors that help payment processors and acquiring banks determine the level of risk associated with a business. These factors guide the approval, rejection, or conditional acceptance (e.g., with reserves or limits) of a merchant account application. Understanding these variables can help merchants better prepare for the underwriting process and improve their chances of approval. The most common factors include:

  • Business Type and Industry Classification: Certain industries, such as travel, subscription services, CBD, adult entertainment, and online gaming, are considered high-risk due to higher chargeback rates or regulatory scrutiny.
  • Processing History: Underwriters examine historical data, such as average monthly sales volume, chargeback ratios, refund rates, and payment method mix, to assess reliability and risk exposure.
  • Business Model and Sales Practices: Subscription billing, delayed fulfillment, or dropshipping models may raise flags, especially if goods or services are delivered after long periods, increasing chargeback risk.
  • Creditworthiness: Both the business and its owners’ credit histories are considered. Poor credit may indicate a higher likelihood of financial instability or default.
  • Financial Stability: Underwriters review bank statements, balance sheets, and profit & loss statements to determine if the business is financially healthy and able to absorb potential losses or chargebacks.
  • Website and Compliance: The merchant’s website is evaluated for transparency and legal compliance, such as displaying terms and conditions, privacy policies, clear pricing, and refund policies.
  • Business Longevity and Reputation: New businesses or startups are generally viewed as riskier than established companies with a strong operational track record and positive online reviews.
  • Product or Service Risk: High-ticket items or intangible goods (e.g., digital downloads, coaching) may increase risk because they are harder to verify or dispute in chargebacks.
  • Geographic Location: Businesses operating internationally or in countries with weak regulatory oversight may be subjected to additional scrutiny.

These factors combined give underwriters a comprehensive view of the merchant’s risk profile and help determine what conditions, if any, should be applied to the account to protect against fraud and financial losses.

Merchant Underwriting Process

The merchant underwriting process is a procedure that payment processors and acquiring banks follow to evaluate a business before granting it access to payment processing services. The goal is to assess the financial, legal, and operational risks associated with the business to prevent fraud, minimize chargebacks, and ensure regulatory compliance. Underwriting helps determine whether a business should be approved, denied, or accepted under specific conditions such as reserves, processing limits, or rolling holds. While the process can vary by provider, the core steps generally include the following:

  • Application Submission: The merchant provides details about the business, including legal name, ownership structure, tax ID, business type, and expected processing volume.
  • Document Collection: Supporting documents such as bank statements, tax returns, business licenses, voided checks, and financial statements are submitted to verify the legitimacy and financial health of the business.
  • Business and Website Review: Underwriters analyze the merchant's website (if applicable) to check for proper disclosures like privacy policies, refund terms, contact information, and overall transparency.
  • Risk Assessment: The business is evaluated based on its industry, sales model, transaction types, and historical data (if any). High-risk indicators like recurring billing or long delivery times may trigger additional checks.
  • Credit and Background Checks: The personal and business credit history of the owner(s) is reviewed, along with any legal or regulatory red flags, such as bankruptcies or past fraud allegations.
  • Approval or Conditional Approval: If the merchant meets risk criteria, they are approved. If risks are present but manageable, the account may be approved with conditions like a rolling reserve or capped processing volume.
  • Ongoing Monitoring: Even after approval, merchants are often monitored for sudden spikes in volume, chargeback rates, or suspicious activity to ensure continued compliance and risk control.

This process ensures that payment providers only onboard businesses that are safe, legitimate, and capable of managing the responsibilities tied to processing credit card payments.

Documents Needed for Merchant Underwriting

To complete the merchant underwriting process, businesses are required to submit various documents that help payment processors verify their legitimacy, financial stability, and risk level. These documents provide nsights into how the business operates, who owns it, and whether it’s capable of handling chargebacks, refunds, and ongoing payment processing responsibilities. While requirements may vary depending on the processor, industry type, and risk profile, most underwriters request the following:

  • Government-Issued ID: A valid identification document (e.g., driver’s license or passport) for the business owner or principal.
  • Business License or Registration: Proof that the business is legally registered and authorized to operate in its jurisdiction.
  • Employer Identification Number (EIN): A federal tax ID issued by the IRS, used to verify the business’s legal identity and tax status.
  • Voided Business Check or Bank Letter: Used to confirm the business’s bank account details for deposit and withdrawal purposes.
  • Recent Bank Statements: Typically 3 to 6 months of business bank statements are reviewed to assess financial stability and cash flow.
  • Financial Statements: Balance sheets, income statements, and profit and loss reports help demonstrate the business’s overall financial health.
  • Previous Processing Statements: If the business has processed payments before, 3 to 6 months of past merchant statements are often required to evaluate volume, chargebacks, and refunds.
  • Website URL or App Access: For online businesses, underwriters review the website or app to ensure it includes legal disclosures, product descriptions, and a secure checkout process.
  • Shipping and Refund Policies: These must be clearly stated to comply with card network rules and minimize disputes.
  • Providing accurate and complete documentation up front can significantly speed up the underwriting process and improve your chances of approval, especially if your business operates in a high-risk category.
Wish you could eliminate credit card fees altogether?
Learn Now
Table of Contents:
More resources:
What Is a High-Risk Merchant Account

A high-risk merchant account lets businesses in industries with high fraud or chargeback risk securely process payments with tailored terms and protections.

‍Read more
What Is a Low-Risk Merchant Account

A low-risk merchant account supports stable, low-fraud businesses with low chargebacks, offering smoother approvals and lower payment processing fees.

‍Read more

Ready to streamline your payment operations?

Discover the hidden automation in your payment, billing and invoicing workflows. Talk to our experts for a free assement!

CTA Image