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Underwriting & Risk Assessment

Last Updated: 2025-12-28 Status: Complete

Overview​

Underwriting is the process of evaluating a merchant's risk profile to determine whether to approve their application, what pricing to offer, and what risk controls to implement. This is where KYC/KYB data meets business analysis.

What You'll Learn​

  • Fundamentals - Core underwriting principles and objectives
  • Risk Factors - Business indicators that signal merchant risk
  • MCC Codes - Merchant Category Code classification and risk tiers
  • Risk Scoring - Automated scoring models and decision frameworks

Why Underwriting Matters​

Proper underwriting protects against:

  • Fraud Losses - Merchants who process stolen cards or synthetic identities
  • Chargeback Exposure - High-risk business models with poor customer satisfaction
  • Regulatory Violations - Prohibited business types or money laundering schemes
  • Sponsor Bank Risk - Portfolio degradation that threatens your processing rights

Risk Assessment Framework​

Key Concepts​

Risk-Based Decisioning​

Not all merchants pose the same risk. Effective underwriting calibrates scrutiny to risk level:

  • Low Risk: Automated approval, standard pricing, minimal monitoring
  • Medium Risk: Manual review, conditional approval, enhanced monitoring
  • High Risk: Enhanced due diligence, restrictive terms, reserves, intensive monitoring
  • Prohibited: Automatic decline, no appeals

The Underwriting Triangle​

Balance three competing objectives:

  1. Conversion Rate - Approve as many legitimate merchants as possible
  2. Risk Management - Minimize fraud, chargebacks, and losses
  3. Operational Efficiency - Automate decisions, reduce manual review

Topics Covered​

Underwriting Fundamentals​

  • Goals and objectives of merchant underwriting
  • Underwriting vs. credit underwriting (lending)
  • Risk tolerance and appetite setting
  • Underwriting policies and exception management

Risk Factors​

Business Type Risk​

  • Industry vertical risk profiles
  • Product vs. service businesses
  • Card-present vs. card-not-present
  • Subscription and continuity models

Processing History​

  • MATCH list status (Terminated Merchant File)
  • Prior merchant accounts
  • Chargeback history
  • Fraud history

Financial Indicators​

  • Business credit score
  • Personal credit score (for small businesses)
  • Time in business
  • Projected processing volume
  • Average ticket size

Reputation Signals​

  • BBB rating and accreditation
  • Online reviews (Google, Yelp, Trustpilot)
  • Litigation and regulatory history
  • Website quality and professionalism

MCC Codes​

  • What are Merchant Category Codes?
  • MCC assignment process
  • Risk tiers by MCC
  • High-risk MCC categories
  • Special restrictions (adult, gambling, nutraceuticals)

Risk Scoring Models​

  • Rules-based scoring
  • Machine learning models
  • Third-party risk scores
  • Score calibration and validation
  • Decision thresholds

Common Red Flags​

  1. New Business, High Volume - Recently formed entity projecting large volumes
  2. MATCH List Hit - Previous termination for fraud or excessive chargebacks
  3. Mismatched Business - Website content doesn't match stated business type
  4. High-Risk MCC - Tobacco, adult, gambling, debt collection, etc.
  5. Suspicious Ownership - Shell companies, frequent ownership changes
  6. Credit Issues - Poor personal/business credit, bankruptcies
  7. Offshore Connections - High-risk jurisdictions, IP address mismatches
  8. Unrealistic Projections - Volume projections inconsistent with business age/size

Topics in This Section​

TopicDescriptionStatus
FundamentalsCore underwriting principles and objectivesComplete
Risk FactorsBusiness indicators that signal merchant riskComplete
MCC CodesMerchant Category Code classification and risk tiersComplete
Risk ScoringAutomated scoring models and decision frameworksComplete
QuizSelf-assessment with 14 questions covering all topicsComplete

Self-Assessment​

Test your understanding with the Underwriting & Risk Assessment Quiz:

  • Questions 14-18: Risk Factors (nutraceuticals risk, delivery timeframes, reserves, MATCH list)
  • Questions 19-22: MCC Codes (assignment, misclassification, high-risk categories, interchange rates)
  • Questions 23-27: Scenario Questions (complex underwriting decisions)

Next: Start with Fundamentals or jump to specific topics based on your interests.

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