Demystifying the Merchant Account Underwriting Process: A Step-by-Step Guide

Jan 7, 2025

If you’ve ever set up a merchant account, you’ve likely heard the term underwriting thrown around. But what does it really mean? And how can you set yourself up for success during this process?

In this post, we’ll break down the underwriting process, explain why it matters, and share practical tips to increase your chances of getting approved with the best possible terms.

Whether you’re a new merchant or a seasoned business owner, understanding the underwriting process will give you an edge and help you navigate it confidently.

What is Underwriting, and Why Should You Care?

At its core, underwriting is the risk assessment process banks and payment processors use to determine whether they’re willing to offer you a merchant account. It helps them gauge how likely it is that your business might present financial risks, particularly through chargebacks—those dreaded disputes where customers reverse transactions, sometimes months later.

The underwriting process is crucial because it directly affects your ability to:

Get approved for a merchant account
Set your processing limits
Determine reserve requirements

A smoother underwriting process means better terms for your business. For instance, I recently helped a merchant initially approved for a $20,000 monthly processing limit due to low business account balances. By providing additional personal financial documents, we secured an increase to $50,000. That’s the power of understanding underwriting and working with an expert.

Step-by-Step Guide to the Underwriting Process

Let’s walk through the key steps involved in underwriting so you know what to expect.

1. Application and Document Submission

Every bank has its own application format, but they all request similar information. At PayDiverse, we streamline this process with a Universal Merchant Application—fill it out once, and we handle the rest. The application process is made seamless through digital signatures, saving you time and hassle.

Documents you’ll typically need include:

Three months of business bank statements
Three months of processing history (if applicable)
Articles of Incorporation
A voided check or bank letter
A clear copy of a valid photo ID
Vendor agreements (e.g., fulfillment services or chargeback mitigation vendors)

For businesses processing over $150,000 monthly, be prepared to provide tax returns as well.

2. Risk Assessment

Next, underwriters evaluate the overall risk of your business. They consider factors like:

Business type and billing model: Subscription services, trial offers, or industries using emerging technologies (like AI) are seen as higher risk.
Financial strength: Both business and personal finances come into play.
Owner credit profile: The creditworthiness of the business owner is key.
Chargeback ratio: More on this below.

Industries with legal gray areas, such as CBD products, may face additional scrutiny.

3. Chargeback Ratio Review

Your chargeback ratio is a crucial metric for underwriters. If your ratio exceeds 2%, your application may be declined. High chargeback rates signal customer dissatisfaction and financial risk.

Tip: If chargebacks are an issue, consider chargeback mitigation services before applying for a merchant account. Keeping your ratio low is key to getting approved.

4. Approval or Declination

Once the underwriter reviews your documents, they’ll either:

Approve your application with specific terms (e.g., processing limits, reserve requirements).
Decline your application.
Pend your application while requesting additional information.

A pending status can be frustrating, but it’s often an opportunity to secure better terms by providing the requested information promptly.

Common Misconceptions About Underwriting

1. “Underwriting is Just a Formality”
Not true! Underwriting significantly impacts your account’s terms and stability. Treat it seriously.

2. “Financial Statements Don’t Matter”
Even if your sales are strong, underwriters closely examine your financials. Strong financials = better terms.

3. “Personal Financials Aren’t Relevant”
For higher volume accounts, personal financial stability is often evaluated. Be prepared to provide personal tax returns or bank statements if needed.

Practical Tips to Navigate Underwriting Successfully

1. Strengthen Your Financials
Ensure both your business and personal financials are in good shape. Be ready to provide personal documents if business financials fall short.

2. Keep Chargebacks Low
Aim to maintain a chargeback ratio below 2%. Use chargeback mitigation services if needed to reduce disputes.

3. Prepare Your Documentation
Don’t wait until the last minute. Have documents like tax returns, profit and loss statements, and vendor agreements ready to avoid delays.

4. Renegotiate Reserve Terms
After 3 to 6 months of solid processing history and low chargebacks, you can often negotiate better reserve terms.

5. Be Transparent
If you have any potential red flags—such as previous chargeback issues or financial concerns—be upfront. Honesty builds trust with underwriters.

Final Thoughts

Underwriting doesn’t have to be a mystery. By understanding the process, preparing your documents, and keeping your business finances strong, you can set yourself up for success and secure the best terms for your merchant account.
Need help navigating underwriting or optimizing your merchant account terms

At PayDiverse, we specialize in simplifying the process and advocating for the best outcomes for your business.