The Green Sheet Online Edition

November 13, 2023 • Issue 23:11:01

Street Smarts^SM

Merchant underwriting in unprecedented times

By Nick Cucci
Fluid Pay LLC

Payment companies play an essential role in allowing businesses to interact and maintain transactions with customers, but this model of business does not come without risk. All payment processing companies need to be aware of potential concerns or risks associated with taking on new merchants and supporting them in transactional relationships with customers.

In this article, I'll explore what merchants need to know about merchant underwriting in these unprecedented times.

What is merchant underwriting?

Merchant underwriting is a process that payment companies undergo when determining whether or not they should work with a specific merchant. For an expanded explanation, see tinyurl.com/c4krhpmd. Every time a payment company agrees to work with a merchant, they are taking on a certain level of risk.

These risks are not random. They can be determined based on certain relevant factors. This is where merchant underwriting comes in. With this process, payment companies will decide whether or not a merchant can be trusted with their payment processes.

Why does merchant underwriting matter?

Merchant underwriting is an important consideration for any payment gateway (see tinyurl.com/mr443exs). In fact, any merchant that is accepted should be considered a reflection of the payment company itself in the long run. When payment companies agree to work with brands that are not reputable, it can cause them reputational damage and lead to disputes, chargebacks and other customer service problems.

Although it is easy to see how merchant underwriting helps payment companies, it is important to note that it also helps merchants. When a merchant is able to show that a payment company supports them, it is a positive reflection upon the merchant. These agreements are built upon mutual trust, and merchants often showcase this on their websites.

Unprecedented times in business

In earlier times, small business owners were a tiny percentage of the business market—at least in terms of overall sales. In today’s world, however, times are changing very quickly. New businesses are being opened at an astonishing rate, and these businesses need payment companies to complete their sales. In the United States alone, there are more than 30 million small businesses operating (see tinyurl.com/2s3pn46x).

It is a great thing that more businesses are opening, but it does open payment companies up to more risks. We live in an age where anyone can start a business. Unfortunately, not everyone is reputable. Some people who open businesses do not have good intentions, and they can end up as a black mark on payment companies that choose to partner with them. Relationships with disreputable parties may even lead to financial loss for payment companies.

To preserve the integrity of the bond between payment companies and merchants, payment companies must do their due diligence. There are several ways they navigate the merchant assessment process. Each of the following can help payment gateways and other payment processors decide whether or not a merchant is a safe and reputable match.

• Bank accounts: Verifying the validity of a merchant is essential, and bank account verification is a wise step to take. This process allows payment companies to confirm that a merchant owns a specific account and that all of the payment information adds up. Ultimately, this shows that the merchant is who they say they are and will be sending the money to a location that aligns with what they are selling.

  The reason bank accounts are a great form of verification is that they are already screened. To open a bank account, merchants must submit a significant amount of documentation to banks. This legal documentation confirms their identity and shows that they are a legitimate business.

• Credit considerations: The credit score system is one of the most powerful tools that the modern world has invented (see tinyurl.com/bde5u7nh). Most companies require credit checks when doing ongoing business, so it makes sense that they are also an important factor when it comes to merchants and payment gateways.

  Credit checks can help show just how reliable a merchant is. With this information, payment companies can show that they do not have a history of poor decisions when it comes to money management. For payment companies, this is a smart way to assess risk.

• Legal documents and credentials: Although anyone can open a business, most places require that businesses submit specific, detailed documentation that proves they are legitimate. These requirements are meant to deter people from participating in money laundering—but they can also be a good way to determine risk and legitimacy for payment companies. Companies can request tax information, legal information and more to ensure that merchants are doing what they claim to be doing.
• Looking out for problem parties: Payment companies and merchants have a mutually beneficial relationship, but that balance can easily shift. For payment companies, part of doing their due diligence is to make sure they avoid doing business with problem parties. To do this, they can examine business interactions in addition to legal documentation, credit history and more.
• Expediting merchant adoption: It is essential for payment companies to be thorough when onboarding merchants, but that doesn’t mean that the timeline has to be long. Payment companies should make it easy for merchants to verify themselves and start working with them when it is possible. To do this, payment companies should find ways to automate and simplify the onboarding process. This can be conducted by setting up applications, offering ways to securely share important information and having dedicated staff that can address concerns as needed.

When merchant adoption is safe and easy and done with due diligence, everyone wins. Merchants sell great services, and payment companies make it easy for them to conduct transactions. However, these agreements are built upon honesty and the understanding that each company's actions will reflect on the other.

To ensure that merchants are meeting certain quality standards, payment gateways must outline legal and business standards completely and make a clear process that allows merchants to demonstrate their qualifications. When companies are thorough, this process should be seamless.

Nicholas Cucci is the co-founder and COO of Fluid Pay LLC. Cucci is also a graduate of Benedictine University and a member of the Advisory Board and Anti-Fraud Technology Committee for the Association of Certified Fraud Examiners, as a CFE himself. Fluid Pay is the ONLY 100 percent cloud-based Level 1 PCI Payment Gateway processing transactions anywhere in the world. Contact Nick at Nick@FluidPay.com. Benefits of crypto for the underbanked

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