Friday, January 12. 2007
Merchant Account Underwriting Guidelines: The Ins and Outs of Credit Card Processing Application Approval
When I look at our competitors’ sites (it is always worthwhile to know what competitors are doing), I marvel at their astonishingly high percentage of credit card processing application approvals. It is commonplace to see the banner, "Over 98% approval rating." It remains incredulous to me that 98 out of 100 applications receive a positive determination when there exists criteria/factors that may easily jeopardize an application’s "passing grade," outlined below:
The merchant’s personal credit rating: Many business owners are surprised, and at times, disgruntled, to discover that their personal credit rating is obtained and evaluated by underwriters. It may help merchants to realize that a such a risk assessment is performed because granting credit card processing capability is tantamount to providing a loan, or at least a short term line of credit. Merchant funding, which generally takes two to three business days, can supercede the time when customers’ receive products or services. Merchant account providers need to employ a safety net, ensuring merchants carry out their responsibilities.
This is particularly important when chargebacks are issued (i.e., when customers dispute the authenticity of a transaction). Consider the untoward circumstance if a merchant just closes his/her bank account prior to anticipated chargebacks. The customer’s card-issuing bank will refund the funds to the customer and then look to the acquiring bank/merchant account processor for its reimbursement. The merchant account processor is left holding the proverbial bag, and may lose thousands of dollars due to merchant-related fraud. This necessitates due diligence performed by the merchant account underwriting department to mitigate its risk for providing credit card processing service.
During the course of my work, I’ve heard and sympathize with the collective complaint from prospective clients (at least those with poor credit) that it is unfair to categorize them as a high risk. Indeed, the vast majority are hard-working, ethical and honest who would never try to swindle anyone. However, merchant account companies are also worried that merchants with a low credit score may not even have sufficient funds to repay them if a chargeback is lost. The Law of Probability suggests that business owners with high(er) credit scores may be more able and likely to fulfill all obligations set forth by Visa and MasterCard regulations and statistically less likely to engage in any fraud or deception. (One’s credit rating affects perception of credit worthiness and those who have a low credit score are not able to secure the best loan rates, if they can even secure a given service itself.)
Unfortunately, not all merchant applicants enjoy ample credit rating scores. Some merchant account providers will permit business owners to get a cosigner – someone with decent/good credit. Those who are unable to secure a cosigner and/or choose not to do so may be compelled to use a third-party provider, open an off shore account, or decide not to accept credit cards at all.
The merchant’s type of business: Merchant account processing underwriting groups not only evaluate a merchant’s credit but his/her line of business. Even if the credit rating score is high, an application decline will materialize if the business is considered too high risk. (Of course, the term, "high risk," is a subjective one and may be interpreted differently by different underwriters.)
One common perception, shared by all underwriting groups is that retail businesses are less risky to approve than online businesses. Indeed , there is much less fraud perpetrated when merchant and customer have face to face interaction. Moreover, merchants who have retail, brick and mortar establishments are considered "safer prospects," – less likely to commit fraud than merchants who open up Internet, potentially "fly by night" businesses. This is not to suggest that merchant account providers do not actively seek to expand their base of online business clients. They just do so with a greater degree of caution than exercised with retail merchant candidates.
Consider a guns and ammunition business. While almost all underwriting departments will approve an application from a guns and ammunition retail enterprise owner, most will not grant application approval if the same business is conducted online.
Certain types of businesses are on the merchant account application bubble – and may fall in the approval pile if other conditions are met. Selling custom items, vitamins, and electronics online, for instance, all fall in the "gray area," and may be deemed acceptable if the owner has good credit, prior processing history, a liberal return policy, etc. As Frank Nunamacher, Manager of the Underwriting Department at United Bank Card, states: "Every account is judged on its own merit."
But certain businesses are automatically declined, instantly dismissed as too high risk and prohibitive. Among these type of "taboo businesses" include debt consolidation companies, telemarketing, travel, adult entertainment, purveyors of cigarettes and cigars, pharmaceutical accounts, international businesses, etc. These industries share a common thread: The notorious high rate of chargebacks. Merchant account providers want to stay clear of problematic chargebacks at all costs.
The merchant’s method of operation: The manner in which a merchant conducts business and receives payment has a bearing on underwriting decisions. For example, consider the scenario where a merchant decides to sell information, planning to make it accessible to his/her readers via a download. Some underwriting groups would be averse to issuing an approval, concerned that it is too easy for the customer to initiate a chargeback. (The customer can aver that the material was not as advertised or cite other reasons.) If that same merchant changes the mode of product delivery and decides to mail the information to customers, the chance for application acceptance dramatically improves since the possibility of chargebacks is greatly reduced.
Similarly, from an underwriter’s point of view, weigh the prospect of a business that has an annual membership and only bills once a year (e.g., magazine subscription business). What happens if a customer wants to cancel after 6 months and the merchant does not readily forward the pro-rated amount back to the customer? A customer chargeback can prove problematic for the merchant, and ultimately, the merchant account processor. Due to this reason, an underwriter would feel much more comfortable approving an application from a business owner who bills monthly.
The merchant’s specified limits: On a credit card processing application, the merchant must write his/her anticipated monthly volume, average ticket and highest ticket. While these amounts may be estimated, and even reflect pure conjecture on the part of the merchant, they can determine whether an application receives a "thumbs up" or a "thumbs down." A new online, home-based business, for instance, requesting a monthly volume of $100,000, may foment an underwriter’s concern. How can such a business substantiate this high of a credit limit? For an application to be accepted, authorizing the high monthly volume, the merchant would have to have excellent, nearly flawless credit and probably be instructed to have a reserve. A reserve is an amount, belonging to the merchant, held at the merchant account processor’s acquiring bank. In essence, it can serve as a hold on the merchant’s funds if fraud is detected and can cover any future chargebacks. If this business owner decides to lower his monthly volume to $10,000, an underwriter is much more apt to approve the application without any restrictions, such as a reserve. (Please note that some merchant account providers mandate that merchants open an account with their affiliated bank, regardless of monthly volume.)
High ticket amounts can also be "deal breakers." A few years ago, I spoke with the owner of a furniture sales business who needed to have a high ticket of $50,000. He admitted that his credit was not good and the company financials were not strong. Based on what he told me, I let him know that it would be impossible to secure this amount for a high ticket. The underwriters would perceive this high amount as a potential threatening liability. He understood and reduced this amount considerably on the application, subsequently approved. (I informed him that he could still accept a transaction that was higher than the specified highest ticket but he would need to provide proof of the transaction (e.g., invoice) and prior monthly bank statements (hopefully showing sufficient funds to cover a possible chargeback.)
Merchant’s Tenure of Ownership: While most merchant account processors welcome accounts from new business owners, others refuse to grant approval to any merchant who has not operated a business entity for a period of time (generally, at least a year). Perhaps it is the human condition to tend to trust experience. For example, most of us would rather fly on a plane with an experienced pilot than one who is relatively new at piloting. Similarly, merchant account providers feel more comfortable with experienced business veterans, preferably with a proven track record, than business newbies.
In a similar vein, it is a little easier for merchants who have obtained prior credit card processing to get their applications accepted than those who have never taken credit cards – as long as the business’ record is good. Underwriters like to receive prior credit card processing statements and look at the chargeback history. A clean history generally results in underwriting approval.
The aforementioned underwriting criteria are all employed when underwriters perform a risk analysis. Unless agents/ISO’s can weed out applications they know will not be approved (based on applicable factors), it is inconceivable that underwriting staff can issue an almost universal application acceptance.
There exists several companies in the merchant account field that do seem to grant almost 100% initial approval. But several weeks later upon closer examination – at least on some of the higher risk accounts – the merchant account provider puts those accounts on hold or places a reserve and/or increases the rates to reflect this deemed higher risk. Obviously, these practices are blatantly unfair to the merchant and cast a dark, dismal shadow on the entire merchant account field. Fortunately, most merchant account providers do not employ such tactics.
For the most part, underwriters are diligent, responsible, analytical and fair-minded, employing a number of criteria to make an important decision (i.e., whether a business owner can obtain credit card processing capability). While the underwriting process is mostly an endeavor based on objective facts, there is definitely a human, subjective element to it. I remember speaking with one underwriter who issued an acceptance to a merchant despite the fact that this merchant had a seemingly too low credit card rating score. He noticed that the merchant’s rating was adversely affected by medical-related expenses and took that into consideration.
So while underwriters employ concrete principles in their decision-making process, they also utilize some degree of personal perception – how they feel about ancillary issues (e.g., extenuating circumstances, for example, affecting one’s credit). They may also emphasize one criterion over another. (One’s personal credit rating seems to play the pivotal role, the majority of cases, in whether an application gets accepted.)
By becoming more acquainted with the rules, policies and practices of underwriting, a merchant can better win underwriting application approval.