Welcome to our in-depth look at the underwriting process for electronic payment processing. In this article, we’ll explore how merchants, ISOs (Independent Sales Organizations), and acquiring banks work together to review, approve, and negotiate terms for a merchant account. We’ll also walk through some of the common objections underwriters have, how to address them, and the various costs—like interchange rates, basis points, and reserves—that often come up in negotiations.
The Three Key Players in Underwriting
1. Merchants
Merchants are likely people like you! The businesses looking to process credit and debit card transactions, echecks, ach and crypto. They come in all shapes and sizes—everything from small e-commerce startups to large brick-and-mortar enterprises. Merchants need a reliable way to accept payments, so they turn to ISOs or banks to help set up their accounts.
2. ISOs (Independent Sales Organizations)
ISOs, like Durango Merchant Services act as intermediaries between merchants and acquiring banks. They specialize in finding suitable payment solutions for merchants, handling much of the sales and support. Often, an ISO can negotiate better deals or more favorable terms for merchants, especially if they have strong relationships with multiple banks. They also help merchants understand the underwriting process and gather the documentation that banks require.
Acquiring Banks
Sometimes called “acquirers,” these are the financial institutions that actually process the transactions and deposit the funds into the merchant’s business account (minus fees). Acquiring banks hold a lot of influence, as they determine whether to approve or decline a merchant’s application based on risk factors such as chargeback ratios, financial stability, and industry regulations.
The Underwriting Process in a Nutshell
The primary purpose of the underwriting process is assessing risk. Banks and ISOs want to feel confident that the merchants they onboard can handle refunds and chargebacks without running into liquidity issues or violating any regulations. During underwriting, merchants typically provide:
Financial Documentation (bank statements, tax returns, balance sheets)
Processing History (if applicable, showing average ticket sizes, monthly volume, chargeback rates)
Business Details (entity structure, type of industry, how products/services are sold)
Compliance Certificates (if in a regulated sector, like nutraceuticals or CBD)
Why so much detail? Because high-risk merchants (e.g., those in travel, adult, vape, or subscription-based services) may pose a greater chance of refunds, disputes, and legal scrutiny. The goal is to prove your reliability and show the bank that you can maintain healthy transaction volumes without consistently running into chargeback trouble.
Factors That Determine Underwriting Terms
1. Interchange Rates
Definition: Interchange rates are fees set by card networks (e.g., Visa, Mastercard) that acquiring banks pay to issuing banks each time a transaction is processed.
Merchant Impact: Merchants generally can’t negotiate interchange directly since these rates are standardized by the card brands, but understanding them is key to recognizing the base costs of accepting cards.
2. Basis Points (Bank and ISO Markup)
- What Are They? A basis point is one-hundredth of a percentage point. You’ll often see a processor markup expressed as “+ X basis points” on top of the interchange rate.
Room for Negotiation: This is typically one of the biggest areas where merchants and ISOs can secure better terms. ISOs with strong banking relationships may be able to negotiate lower markups.
3. Reserves
Purpose: A reserve (rolling reserve or fixed reserve) is an amount of money the bank holds back from each transaction to safeguard against unexpected losses or chargebacks.
Negotiation: High-risk merchants might face higher reserves, but showing strong financials, low chargeback ratios, or implementing robust fraud prevention tools can help reduce the reserve percentage or remove it over time.
4. Other Fees and Costs
Monthly/Annual Fees: Processors or banks may charge a monthly gateway fee or annual membership fee.
Chargeback Fees: Each time a chargeback occurs, a merchant could be hit with a per-chargeback fee. Minimizing chargebacks not only keeps you in good standing but also lowers these extra costs.
Setup or Termination Fees: Some contracts include one-time setup fees and early termination fees if you switch providers before your contract ends. It’s worth discussing and clarifying these details to avoid surprises later.
Negotiation Strategies for Better Terms
1. Understanding Your Data
Before negotiating, know your numbers: average transaction size, monthly sales volume, chargeback ratio, and seasonality trends. Having a clear grasp of your metrics—especially if they show steady growth and low risk—gives you leverage when asking for lower rates or reduced reserves.
2. Highlighting Risk Mitigation
Implementing strong fraud prevention and chargeback management can significantly boost your bargaining power. Show potential processors your security measures (e.g., CVV checks, address verification, robust refund policies) to illustrate that you’re proactive about risk control. You can speak with your account manager at Durango Merchant Services to make sure you are doing everything possible.
3. Shop Around
Don’t be afraid to compare offers from multiple ISOs or acquiring banks. Each partner has different underwriting guidelines and appetites for risk. If one provider gives you unfavorable terms, use a better offer from another provider to potentially negotiate a match or improvement.
4. Bundling Services
Sometimes, bundling related services—like payment gateways, POS systems, or additional security tools—can yield lower costs overall. Processors often prefer to manage more services for a single merchant and may extend better rates for that extra revenue.
Boosting Your Approval Odds
1. Transparent Communication
Maintain open lines of communication with your ISO. Provide all requested documentation promptly. If the underwriters see that you’re organized and willing to address concerns head-on, they’ll be more inclined to approve your application.
2. Show Past Success
If you’ve processed payments before, present any history that showcases consistent volumes and minimal chargebacks. Solid transaction history is one of your strongest assets in proving you can handle credit card processing responsibly.
3. Operational Readiness
Underwriters love to see a merchant who’s prepared for growth. Have updated websites, a clear customer service plan, published policies for refunds/exchanges, and documented compliance with regulations specific to your industry. These details help the underwriter see you as a less risky prospect.
Common Underwriter Objections and How to Overcome Them
High Chargeback Ratio
Solution: Provide evidence of dispute management protocols (quick refunds, clear billing descriptors, fraud filters). Propose chargeback alert systems or automated fraud detection.
Insufficient Financial Health
Solution: Offer updated financial records showing consistent revenue. Highlight any investor backing or available credit lines for unexpected shortfalls.
Regulatory Concerns
Solution: Emphasize existing licenses, certifications, or legal opinions. For high-risk industries like nutraceuticals or gaming, compliance documents are essential.
Lack of Processing History
Solution: Present business projections, show relevant experience, or partner with an ISO that can vouch for your business model.
Final Thoughts and Key Takeaways
Approaching the underwriting process doesn’t have to feel intimidating. By understanding what underwriters look for—and by partnering with an ISO that truly knows how to advocate on your behalf—you can significantly improve your odds of approval and secure more favorable terms. Transparency, preparedness, and a willingness to address potential risks are the keys to forging a successful, long-term relationship with your processor or acquiring bank. In Brief:
Merchants, ISOs, and Banks work in tandem, but each has distinct motivations and risk tolerances.
Underwriting evaluates risk by reviewing financials, processing history, and compliance.
Negotiations often hinge on factors like basis points, reserves, and additional fees. Proactive risk management and strong documentation are crucial.
Common Objections (high chargebacks, weak finances, or regulatory problems) can be overcome with proper evidence, strong business practices, and open communication.
If you have any questions or want additional guidance, we’re here to help you navigate these complex waters and ensure you’re well-positioned to thrive in the risk averse world of electronic payment processing. Here’s to a smoother, more profitable partnership for your business!
