Underwriting for High-Risk Merchants: How to Get Approved in 2025

Overwhelmed by the underwriting process as a business owner looking to set up a merchant account? In this episode, join Frank as he does a deep dive into the often misunderstood topic in the world of payments, the underwriting process. He’ll cover what happens during the underwriting process, how to improve your chances of approval, and what the acquiring banks are looking for. Whether you're new to payments or an experienced merchant, this episode will help you to better understand what's happening behind the scenes when you apply for a merchant account and how to navigate it effectively.

In this episode these questions and topics will be covered: 
• 2:06 - What is underwriting?
• 2:46 - Why does underwriting matter for you as a business owner?
• 3:44 - The key steps you can expect in the underwriting process.
• 7:00 - The biggest misconceptions merchants have about the underwriting process itself.
• 9:00 - Tips for making the underwriting process smooth and successful for you.

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Website: http://www.paydiverse.com
LinkedIn: https://www.linkedin.com/in/franksena

Transcript

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Hey, welcome to The Payments Guy, your ultimate guide to demystifying the confusing world of merchant payments. I'm Frank Sena, your host, a merchant payment specialist with nearly a decade of experience. In each episode, we'll break down the toughest challenges in the payment space so you can be better informed when navigating payments for your own business. From minimizing the impact of chargebacks, avoiding funding issues, and ensuring you're never stuck without the ability to process payments, we'll help you make smarter decisions and grow your business. Let's get started. Welcome back to another episode of The Payments Guy. I'm Frank Senna and today we're deep diving into a crucial but often misunderstood topic in the world of payments, the underwriting process. Underwriting is a term that's thrown around a lot, especially when setting up a merchant account, but what does it really mean? More importantly, how do you maximize your chances of success and get your merchant account application approved? Today, we're going to demystify underwriting step-by-step I'll explain why it matters, what underwriters are looking for, and how you can set yourself up for success. Whether you're new to payments or an experienced merchant, this episode will help you to better understand what's happening behind the scenes when you apply for a merchant account and how to navigate it effectively. So let's start with the basics. What is underwriting? Underwriting is the process where banks and payment processors assess how much risk your business presents and decide if they're willing to take that risk by offering you a merchant account. The main risk for banks is that after they pay you for a transaction, the cardholder could dispute the charge sometimes up to six months later. If that happens, the bank has to refund the cardholder, but they've already paid you, which leaves them exposed to financial loss. Underwriting helps the bank decide whether they want to take on that risk for your business So why does underwriting matter for you as a business owner? Underwriting is crucial because it determines whether you'll be approved for a merchant account and the terms of that account, such as processing limits and reserve requirements. Successfully navigating the underwriting process is key to securing the best possible terms for your business. a month in processing volume due to the low balances in their business bank account. However, because they were working with me, I asked them to provide additional personal financial documents which showed stronger cash reserves and as a result, we got their limit increased to$50,000 a month. This is a great example of how working with an expert can help you maximize your approved monthly volume cap and secure the best possible terms for your merchant account. Now, let's break down the key steps steps in the underwriting process so you know what to expect. So each bank has its own unique merchant application format, but they all ask for the same basic details. At PayDiverse, my company, we simplify this process with our universal merchant application, which only needs to be filled out once. Then we merge your information onto the applications for all of our bank partners, saving you time and sparing you from repeatedly providing the same details. You just have to provide it to us once. We use a digital signature service to send the completed applications for you to review and sign electronically, making the process seamless. The documents you need to include three months of recent business bank statements, three months of processing history, if you have any, your articles of incorporation, a voided check or a bank letter, a copy of your photo ID, and then copies of any vendor agreements that you have, like a fulfillment vendor or a chargeback mitigation vendor. And if you're requesting a merchant account over$150,000 a month, you may be required to provide additional documents like tax returns. Next, The underwriter will assess the risk of working with your business. They're going to look at your business type, your billing model, your financial strength, and the credit profile of the business owner. And most importantly, if you have processing history, they're going to look at your chargeback ratio. Certain billing models that have a subscription or maybe a free trial or businesses that use emerging technologies like artificial intelligence are usually considered higher risk. And then any industries with unclear legal guidelines like CBD, for example, could face more scrutiny. One of the most significant factors in the underwriting process is your chargeback ratio. If your chargeback ratio is more than 2%, your application is definitely going to be declined. Chargebacks represent disputes from customers who reverse charges and underwriters see this as a major red flag because it indicates potential risk and dissatisfaction from your customers. If your chargeback ratio is high, you'll need to address it before applying for a merchant account or work with the chargeback mitigation service to help get those chargebacks down. So once all of the documentation has been reviewed by the underwriter and your application, the underwriter is either going to approve or deny your application. If approved, you'll receive specific terms like processing limits or reserve requirements. However, your application could get pended, which just means the underwriter needs more information before they can make a final decision. This can be really frustrating for some merchants, but it's important to understand that this additional information helps ensure you get the best possible terms. We also want to make sure that the underwriter completely understands your business. We don't want there to be any surprises after they provide an approval. So it's better to get everything out there upfront so that the underwriter knows what they're getting into and that will avoid issues down the road after your account has been approved. So let's talk about some common misconceptions merchants have about the underwriting process itself. One of the biggest misconceptions is that underwriting is just a formality. It's a box to check off before you can start processing payments. But in reality, underwriting is a major role in determining your account's terms and long-term stability. It's basically the way that the bank determines whether or not they want to get into business with you. Another common misunderstanding is that financial statements aren't that important, especially if your business has a great sales record. But underwriters are going to look at your financials closely along with your processing history and the chargebacks on it in order to assess the risk. The stronger your financials, the better terms that you're likely to get. And keep in mind, if your bank statements show deposits from any merchant processors, then the underwriter is going to need to see those processing statements before they can proceed with completing the underwriting process. So that's an important thing to note if it's It's on your bank statement. That is evidence that you have processing history, and that means that the underwriter is going to need to see that processing history before they're willing to approve or decline your account. Finally, many merchants are surprised when underwriters ask for personal financial documents, especially for larger accounts. Things like your tax returns, personal bank statements, and maybe personal investment statements could be required to show the underwriter that the business owner is financially stable, particularly when applying for higher volume caps. Think about it. If you were going into business with someone and they only had$100 in their bank account, you might not want to consider going into business with them. But if you see that they have strong financials, they have cash on hand to cover any issues that might come in, you're going to be a lot more keen to work with that person. So how do you make sure the underwriting process goes smoothly? Here's a couple of practical tips for you. So first of all, show the strongest financial face that you can. Strong financials, including both your business and personal accounts, can make a huge difference in the underwriting process. Just be prepared to provide personal financials if necessary, especially if your business financials alone aren't as strong. For example, there's a lot of merchants who might just be getting started and they don't have a ton of money in their business bank account, but they might have plenty of money in their personal savings or or a joint checking account with their partner, or maybe even another business that they might have. In that case, you can provide financials from your personal life or from other businesses as long as we have documentation to connect those bank statements to you. So basically the key to success here is showing the strongest financial face that you can by providing as many bank statements to help the underwriter feel comfortable approving your application. So chargebacks on your processing history are going to be the biggest red flag for an underwriter. If an underwriter sees that your chargeback ratio, which is the ratio of chargebacks to total transactions in a one month period, if that ratio is over 2%, then they're automatically going to decline the merchant application. The reason is these banks, they really need to be careful looking at their overall portfolio of all of the merchants in there, and they need to keep their chargeback ratio low across their whole portfolio to keep the card brands like Visa and MasterCard happy. So if you're struggling with chargebacks and you have chargeback issues, meaning your chargebacks are over 2%, consider using a chargeback mitigation service or rapid dispute resolution to help get your chargebacks down and into a reasonable place. Also, just to set your expectations, underwriters will often ask for detailed documentation, especially when we're working on getting you a merchant account with over$150,000 cap per month. So So make sure that you are prepared to provide a copy of your tax return for your business. If you don't have business tax returns, then your personal tax returns will be sufficient. They might want to see financials like your P&L statement or a balance sheet, or they might request additional documentation or changes and updates to your website to make sure your website is compliant. It's better to have these documents ready to go and to be thinking about what might be needed in order to expedite the underwriting process. Sometimes the bank might ask for a profit and loss statement and the merchant then has to ask their accountant to provide this and it takes the accountant three weeks. And now the underwriting process is on pause until we get that document. So start thinking about that at the beginning of the process, have all of your ducks in a row and you're gonna get a merchant account approval a lot faster. As I mentioned earlier, a reserve may be required. It's going to be determined by the underwriter during the underwriting process. The reserve is your funds, but the bank gets to hold on to them. It's typically they'll take 10% of all the money they collect and just set it aside in a reserve account. And this is a way that the bank manages and mitigates the risk of working with you. The reserve helps them to ensure that if all of a sudden something goes wrong and you get a lot of chargebacks that you've got some money on hand to cover that cost so that the bank doesn't get screwed. So depending on the business type, your credit history, your financials, you might be required to have a reserve on your account. But the good news is after three to six months of consistent processing, we can actually renegotiate the terms of your reserve to get them to be more favorable for you. So if you have strong financials and your chargeback ratio is low, we may be able to reduce your reserve percentage. For example, if it's a 10% reserve, we might be able to get that reduced to a 5% reserve. We could also request that they cap the reserve, meaning that they will not collect additional funds in that reserve. They'll just hang on to whatever they've collected so far, but they will not continue to collect that 10% or that 5%. We can also ask them to release some of the funds that they've already collected, which depending on the business type, your financials and your processing history, they may be willing to do. It's important to keep in mind that for certain industries, a bank is always going to require a reserve no matter what. So it really is going to depend on each bank's risk tolerance and their own analysis of that risk. So one other thing to keep in mind is that if there's something in your business or your financial history that could raise concerns with the underwriter, like chargebacks or maybe other financial issues, be upfront about it. Transparency with the underwriter will help build trust and can prevent issues later on. These guys are super thorough, so they're going to find out if there's an issue. It's better to be straightforward and have an explanation rather than wait for them to catch you, maybe not being straightforward and then losing trust and maybe just saying, you know what, we're not going to approve this account. So that wraps up today's episode on mastering the underwriting process. I hope this was helpful. I hope you now have a clearer understanding of what's involved and how you can improve your chances of getting approved with really good terms. If you found this episode helpful, don't keep it to yourself. Please share it with a friend or a fellow business owner who could benefit from this information. I'd love if you could text them this email episode so that they could listen to it and hopefully help them navigate their own underwriting process better. And as always, don't forget to subscribe if you're watching this on YouTube or follow me on Instagram or LinkedIn for more tips on optimizing your payment processes. If you have any questions, feel free to reach out directly. I'm always here to help. Thanks for listening. And until next time, I'm Frank Sena and I'm reminding you to keep optimizing your payments. Have a great day.