This article covers the basic concepts of underwriting for payment processing, the most commonly arising questions, and how to work with sub-merchants to resolve underwriting inquiries effectively.

Underwriting fundamentals

Within the scope of payment processing, underwriting is the process by which a business’s (sub-merchant) processing application is reviewed and assessed prior to an account being provisioned and activated. The process is similar to how an individual may be underwritten for a loan for a large purchase, however, it’s also different since there is no definite endpoint with a payment processing account as there would be for a loan (i.e. a loan payoff).

During the underwriting process, Stax will review all of the information provided by the sub-merchant on their application for a processing account. Every piece of information plays a part. Not all information is useful, however in combination with the other information, every piece plays a critical role in the process. This guide will also help you be proactive and prevent applications from becoming pended.

Criteria

Stax’s underwriters evaluate every element of the sub-merchant’s processing application.

At a high level, the underwriter is attempting to validate the following details about the sub-merchant business:

• Legitimacy of the business itself
• Applicant’s identity
• Overall riskiness the sub-merchant poses to Stax and its Partner
• No signs of fraud or illegal activity
• Applicant’s creditworthiness
• Financial integrity of the business
• Validity of the sub-merchants bank account

The enrollment application contains enough details for an underwriter to make this assessment in most cases. In some cases, however, either there isn’t enough information, the information appears inaccurate, or there are inconsistencies that will give the underwriter pause.

Purpose of Underwriting

Due to the nature of digital payment processing, it’s crucial that Stax underwrites every sub-merchant account to ensure that the business’s processing behavior doesn't create outsized risk.

Credit card charges can be disputed and a chargeback can be initiated up to 120 days after the transaction. For ACH transactions, this period is 60 days. At any point during these intervals, the cardholder can challenge the transaction, often resulting in the funds being “clawed back” or debited from the sub-merchant’s account until the matter is resolved. Before the funds being debited from the sub-merchant, they are debited from Stax. If the sub-merchant doesn’t have enough funds to cover the debit, or if the bank account Stax has on file with the sub-merchant is no longer valid, it becomes exceedingly difficult for Stax to recoup those funds. In other words, Stax is left paying the cost for the sub-merchant’s reckless behavior. This can lead to account terminations, account reserves, and increased costs for every sub-merchant in the ecosystem.

By underwriting the sub-merchant up front, Stax can greatly mitigate the risk associated with payment processing and maintain low costs for all involved.

The US Federal Government also imposes requirements that financial institutions like Stax collect certain information up front when an applicant seeks to open a merchant processing account. These requirements fall under the FinCEN rules and the USA PATRIOT Act legislation and are non-negotiable.

APPLICATION REVIEW SLA

Most enrollment applications are initially reviewed by an underwriter within about 36 - 48 hours of the sub-merchant’s signature. There are occasions when this will take more or less time, but this is a reliable benchmark.

If an application is pended (see below), this process can take longer. The turnaround at this stage is almost exclusively dependent upon the sub-merchant’s responsiveness and ability to provide the information requested.

Status

An application may go through various stages of underwriting statuses, but most applications will only ever experience a few underwriting statuses. The possible statuses are:

Ultimately, Stax wants to approve as many merchant processing accounts as possible. Aside from assessing risk, it is the underwriter’s goal to find a way to approve an account even if there are questions about the enrollment application. Risk mitigation will always take priority, but if the risk is deemed within a suitable threshold, Stax wants to approve the application.

When an application cannot be immediately approved, it will move into a “pended” state. This means the underwriter has reviewed the application and may need clarification, additional documentation, or both.

When an application is pended, it is the Partner’s responsibility to work with the sub-merchant to resolve the pended state and work to get the application approved. The Stax Connect team will work with the Partner to help make this happen, however, the Partner will be working with the sub-merchant directly.

Preventing an application from becoming pended

Applications are underwritten based on different levels of risk exposure for Stax. Factors for exposure can be annual volume, time to delivery of product or service, chargeback/refund rates, and MCC. Review Supporting Documents for the Application Process to gain a full understanding of items that will help ensure a speedier underwriting approval process.

Pended application resolution

The first step in resolving a pended sub-merchant application is to stay informed of the status of all applications currently in flight. This can be done a number of ways, but is most easily accomplished by closely monitoring the Registration Flow within the Stax Connect Command Center dashboard:

Clicking on any of the statuses shown will bring up a filtered view listing out only those sub-merchants to which the status applies.

Similarly, clicking on Merchants in the left navigation will bring up a full list of sub-merchants to which filters can be applied manually to see only the desired statuses.

Once this is done, a pended account will appear as shown here when displayed in the Merchant List view:

Clicking the merchant record in the list view will bring up the Business Info on the sub-merchant, where much greater detail is shared. For the purposes of this article, we’re concerned with the Underwriting/Application Status, the Pended Reasons, and the Notes.

Pended Reasons

This section will highlight the high-level reasons why the sub-merchant’s application was pended by the underwriter. These are primarily meant to categorize the many reasons an application could be pended, but also to provide some context as to what it is about the merchant’s account that could be called into question (see above about Underwriting Criteria).

Notes

Here the underwriter will provide details about the pend reason, and what information or steps are needed to resolve the application pend. This information is what the sub-merchant will need to know in order to get their account approved. The information here is meant to be human-readable and understandable by someone that may not be well versed in payment processing jargon.

Once it’s clear why the sub-merchant’s account has been pended, the required information can be shared with them and they can begin working on gathering what’s needed.

Depending on how payments have been integrated into the Partner’s platform, the sub-merchant may be able to provide the requested documents or information securely through the platform. If this is not possible, it is recommended that the Partner capture this information and upload the documents via the Stax Connect Command Center.

Once the sub-merchant’s profile has been opened, click on Enrollment and make the necessary corrections, or use the secure document upload feature to pass along any files on hand.

As stated above, the resolution of a pended application can be quick, or it can be drawn out. It’s almost entirely dependent upon the sub-merchant’s responsiveness and thoroughness in providing documentation and answering outstanding questions.

Pend reasons and resolutions

There are a number of reasons why a sub-merchant’s application may be pended by an underwriter. Each may have its own distinct path to resolution. The most common pend reasons are outlined here, along with the corresponding resolution.

NOTE: In some rare cases, an application may be pended for reasons not listed here. In those cases, Stax will work with the Partner on the best course for communicating with the sub-merchant and resolving the matter.