Underwriting Merchant Accounts

Underwriting of small business merchant accounts is done by banks that are members of the Credit Card Associations of Visa and MasterCard. The underwriting process consists of evaluating the risks, associated with allowing a merchant to accept credit cards through a detailed analysis of the applicant's credit history and the business' previous processing history (if applicable). Banks want to make sure that applicants are responsible entities, because, in effect, a merchant account processing service is a form of credit. When a merchant receives a card payment, it is authorized, cleared and settled by the credit card merchant processor. At the end of the business day the processor receives the transaction information and funds the amount, after subtracting its processing costs, into the merchant's checking account. Then it waits for the card issuing bank to remit the payment amount. At this point, if the issuer or their cardholder disputes the transaction, initiating a chargeback, or if it turns out that the transaction was fraudulent, the processor may never receive its money. In addition, if a merchant generates a consistently high level of chargebacks (over 1%), the Credit Card Associations will assess fines on the credit card processing company that has underwritten the account.

Merchants usually receive their processing service from Independent Sales Organizations. These are licensed by the Credit Card Associations and have relationships with creditcardprocessing banks. Once a processing agreement is signed, the processing bank, also known as a merchant bank or acquiring bank, commits to acquiring the merchant's card transactions and funding the transaction amount minus the processing costs. Processing banks are usually card issuers as well.

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