Offering payment processing services is a move that makes sense for a lot of SaaS companies, particularly if your software helps your customers run their business.
For example, if you have a project management app, then you can add payment features that allow people to use your software to take payments from their clients. Similarly, if you provide appointment scheduling solutions, then it’s worth offering payment tools so your users can leverage your solution to take upfront payments and deposits.
Adding payments to your suite of features and offerings enables you to provide more value to your users. They can take advantage of more features, which then encourages them to keep using your software.
Not to mention, payments serve as an additional (and highly lucrative) revenue stream for SaaS companies, so your business will also enjoy a healthier bottom line.
How exactly can you get your users started with payments? The first step is to find a partner that can provide the right payment technologies and services to your customers. From there, your users must go through an application and underwriting process that determines their eligibility to accept payments.
TL;DR
- Merchant underwriting is the risk level assessment process an acquiring bank carries out on every new merchant before they grant them a merchant account.
- The bank assumes the risk on behalf of the business and needs to make sure that they screen new businesses before handing out merchant accounts. This is where merchant underwriting comes in—merchant account underwriters check if new merchants meet the guidelines set by the bank and card brands.
- A business can choose to open a merchant account on their own but the process can be laborious and time-consuming. SaaS companies can avoid having to integrate their software with that of gateways and banks, undergo thorough merchant underwriting, and submit mountains of documents by working with a trusted PayFac like Stax to make their software more comprehensive for their clients.
What Is Merchant Underwriting?
In simple terms, merchant underwriting is the risk level assessment process an acquiring bank carries out on every new merchant before they grant them a merchant account. Before we learn more about merchant underwriting, let’s understand what a merchant account means and why having one is important for any business.
A merchant account is a kind of commercial bank account that is necessary for any business that wants to accept any type of electronic payment such as those made via credit and debit cards. Unless a business sticks to accepting only cash, all payments processed electronically in its brick-and-mortar locations, through online payment portals, via email or messages, and through IVR are settled using this bank account.
Your SaaS clients will need to have a master merchant account if they want to facilitate ACH, debit cards, eChecks, and credit card payments for their sub-merchants. Merchant accounts are set up with acquiring banks, which can be any large bank that offers a deposit account to a business and provides them with services to be able to accept electronic payments.
For an acquiring bank, processing any payment is similar to extending a line of credit to the business. This means that the bank assumes risk on behalf of the business and this is why they need to make sure that they screen new businesses before handing out merchant accounts. This is where merchant underwriting comes in—merchant account underwriters check if new merchants meet the guidelines set by the bank and card brands.
How Does Merchant Underwriting Work?
The merchant underwriting process has a few steps before a SaaS company can begin offering credit card processing.
1. Application and Initial Screening
The process begins with the SaaS company submitting an application to a payment processor, acquiring bank, or payment service provider. This application includes details about the company’s:
- Business model
- Ownership
- Financials
- Expected transaction volumes
The initial screening involves verifying the business’s legitimacy, checking the identities of key stakeholders, and ensuring the business model falls within acceptable risk categories. Once these items have been assured, an underwriter will begin the process in earnest.
2. Business Model Evaluation
Next, the underwriter evaluates the merchant’s business model, focusing on the nature of its services, subscription plans, billing cycles, and customer acquisition methods.
This assessment is particularly important for SaaS businesses, as their revenue models often involve recurring billing and subscription-based payments, which require careful scrutiny to understand potential risks like chargebacks and cancellations. Additionally, the company’s compliance with data privacy regulations, such as GDPR and CCPA, and adherence to payment security standards like PCI DSS, are reviewed to ensure regulatory compliance.
3. Financial Assessment
Underwriters next review the financial health of the merchant company. Underwriters review the company’s financial statements, cash flow, and profitability. This provides them with a way to gauge the company’s stability and ability to handle refunds and chargebacks.
The financial assessment involves a credit risk analysis, which examines the creditworthiness of the company and its key executives, looking at factors such as credit scores and past financial behavior. Underwriters may also request bank statements to verify cash reserves, which are essential for managing potential disputes or financial obligations.
4. Risk assessment and scoring
The underwriter evaluates the likelihood of chargebacks and fraud to develop a risk profile, considering factors such as the company’s history, transaction patterns, and customer behavior. SaaS businesses that operate with models involving free trials, freemium services, or month-to-month subscriptions may be considered higher risk due to the increased potential for disputes or cancellations.
The company’s terms of service, privacy policies, and refund policies are also scrutinized to ensure they provide sufficient clarity to customers, thereby minimizing the risk of chargebacks and disputes.
6. Approval
Based on this analysis, the underwriter decides whether to approve or decline the application or impose additional conditions, such as reserve requirements or transaction limits. If approved, the merchant company is typically subject to ongoing monitoring to track transaction patterns, chargeback ratios, and compliance with regulatory standards.
This dynamic risk management process allows the payment processor to respond quickly to any unusual activity, such as a spike in chargebacks, by taking actions like holding funds in reserve or requesting further documentation.
How a PayFac like Stax can help
A business can choose to open a merchant account on their own but the process can be laborious and time-consuming. For first-time business owners and small businesses, the process of getting their businesses approved for merchant accounts can be complicated as it requires knowing various guidelines, collecting the right data, and submitting lots of documentation.
Working with a payment facilitator can be the answer here. By hiring the services of a payment facilitator or processor, a business does not have to open its own merchant account. Instead, only the PayFac will have a merchant account as it allows its clients to accept payments.
This system works very well for SaaS providers. Software service providers can partner with a payment processor so that they can offer payment processing options to clients who use their software for other business tasks. SaaS companies can avoid having to integrate their software with that of gateways and banks, undergo thorough merchant underwriting, and submit mountains of documents by working with a trusted PayFac like Stax to make their software more comprehensive for their clients.
What Merchant Underwriters Need to Know
During the merchant underwriting process, there are five important factors about a business that an underwriter needs to look into. As a software company, you can help your clients understand what merchant underwriters need to know and help them gather all the required information to simplify the underwriting process.
- Products and services offered
- Industry risk
- Transaction size and volume
- Chargeback volume
- Billing policies
As a software provider, you can implement some best practices to make these processes as streamlined as possible, so your users can get up and running with payments ASAP.
Let’s explore them below.
Best Practice #1: Understand the Payments Funnel in SaaS
To improve the payments experience of your users, you first need to understand the payments funnel within the context of SaaS companies. Richard Dunbar, VP of Professional Services at Stax, says that there are two key components to this: payments attachment (top of the funnel) and payments processing (bottom of the funnel).
The former refers to the phase of the journey when users first enroll in payments, while the latter is when they actually start processing.
According to Richard, many SaaS companies and ISVs focus on the “attachment” part of the journey and expect users to just start processing.
But it doesn’t work that way.
To truly maximize your payments initiatives, you need to think of the payments funnel holistically and understand when and where to:
- sign up users for payments; and
- prompt them to use the feature and initiate transactions.
“This is what we call payment adjacency,” explains Richard. “It’s about knowing where in your app it makes sense to have payments-related activity. That could be during sign-up or it could be at the point when they need to send an invoice.”
He continues, “It’s not as simple as putting a signup button and expecting people to click it. You have to put your payment offerings in front of users when and where they have the inclination to do it.”
The right payments-adjacent strategy depends on your software, as there are many ways to put payments in front of your users. For example, if you’re a point of sale or eCommerce platform, then it may be beneficial to have the payments conversation early. For other companies, the right time to introduce payments may be when a user is about to engage in payment-related activities like invoicing.
There are other methods to implement payment adjacency and the best course of action will vary based on your customer journeys and offerings
“We have some ISV partners where their software will ask the user about payments when they’re on the platform’s invoicing feature. Their system will say, ‘Hey, did you know that you can process payments through our software?’”
“Then it’ll give users the opportunity before they send the invoice to quickly sign up for payments so that they can embed the digital payment link straightaway.”
All this to say that offering payments isn’t just about building a feature and waiting for people to discover it. You need to be smart about timing and placements to ensure you’re presenting payments at the most optimal time.
Doing so will make it easier for users to see the value of the feature and they’re more likely to adopt it.
Best Practice #2: Familiarize Yourself with the Payments Underwriting Process and Requirements
Underwriting is an important part of getting your customers onboard payments. It involves submitting information from your users, analyzing their payments data, and assessing risk. It can be a time-consuming process without the right approach and a solid payments partner. Richard says you can make this step easier by familiarizing yourself with the underwriting process and requirements of your specific processor.
The underwriting process involves five steps as detailed below.
- Document gathering – The merchant account application requires a business to submit many documents including bank statements and others regarding business type, transaction processing volumes, and financial history. You will probably have the information required by your client at this stage and you can improve customer relations by making it readily available to them. You can also help clients submit documents in the format requested by your PayFac.
- Application review – Once you pass on documents on behalf of your client to your payment processor, their merchant underwriters will review them. The time taken in this step is usually shorter when you partner with a PayFac like Stax.
- Follow-up – This is when the underwriters will get back to you if they need more information from your clients.
- Application approval – The underwriter approves or rejects the merchant account application during this stage. A few reasons for rejection can be high-risk merchants, bad credit scores, and transaction volumes that are outside of the norm in the industry in which the business operates.
High-risk industries include firearms and gambling and here the underwriter can approve the application by increasing processing fees. A high chargeback rate and high transaction volumes can be suspicious for a small business which can lead to applications being rejected. Underwriters also look for large transactions or inconsistencies in transactions.
- Onboarding – If the application is accepted, your PayFac starts onboarding your client. With a good payment processor, you will only have to integrate one simple API for payment processing with your software product that the client is already well-versed in.
“Depending on the processor, the underwriting process and requirements are going to vary. But there are certain things that are consistent, and those are the things that SaaS providers and ISVs need to make sure they’re educated on.”
The Financial Crimes Enforcement Network (FinCEN), a government agency that analyzes financial transactions, requires payment processors to analyze merchant information and do enough due diligence to assess risk.
“You may already know some of those FinCEN requirements, depending on your type of application,” says Richard. “So instead of asking your users to give that info to you again, you can just say, ‘We already know this information, so we’re just going to send it through.’”
That way, you can unburden your users from having to dig around for data. This, in turn, helps them complete the application faster. Another way to look at it is that you are allowing your clients to be completely transparent in their merchant account applications, which is essential if you want their applications to be approved.
Best Practice #3: Leverage Data From Your Platform
You can further streamline the underwriting phase by putting what you already know about your customers to work. One common question that’s asked during the payments application process is how much credit card volume the merchant processes.
Ironically, many business owners don’t know the answer to that question.
“The reason they don’t is that a lot of them are doing this for the first time, so they have no idea. Or, they may work with a processor they’re unhappy with so they never push people to use credit cards, which means their figures are skewed,” remarks Richard.
If you’re offering payments through your software, you will be much better off using the data you already have, rather than asking your customers to provide it.
For instance, if your platform has invoicing capabilities, you can look at your user history to figure out their transaction volumes. From there, you can provide your payments partner with an informed estimate that they can use during the underwriting process and quickly enroll users into using the payments feature. You can also deduce the expected transaction volumes for a business in the future so that your payment processor can put the correct transaction lines in place.
Information such as chargeback history, credit history, sales volume, transaction size, etc. should be easily available to SaaS providers that offer invoicing services. You can collect accurate data and offer it to your payment processor, which will make the merchant account underwriting process far easier for your clients and reduce the chance of multiple follow-ups and rejections.
Best Practice #4: Customize Your Payments Application
Use the insights and info you glean from the above steps to design an efficient application and payment enrollment procedure for your users.
Once you know what information is necessary and what steps the processor will take to evaluate the merchant, you can customize your application to make it as simple as possible for the user to complete.
Accomplishing this is easy when you have the right payments partner. At Stax Connect, for example, we allow you to enroll merchants in 3 ways:
- Full API enrollment. The process takes place within your app, giving your users a fully branded experience.
- Hybrid API enrollment. The payment enrollment procedure begins on your platform, then customers are redirected to a white-labeled landing page where they can complete the application.
- White-glove enrollment. This option lets you fill out the payments application form for your users.
Regardless of which option you choose, you have the ability to tailor the application process based on the info you need. You’re in control of what questions to include and how the application is formatted.
Best Practice #5: Be Upfront About Approval Estimates
So, your customers filled out the application and submitted it to the payments processor. What’s next?
Well, depending on your payments partner, users could breeze through the process… or it could take a while.
The key is to talk to your payments services provider and ask them about their approval times. For some processors, it could take about a week for a merchant to get approved.
But for best-in-class providers (like Stax Connect), the process takes just a couple of hours.
Whatever the case, be sure to communicate with your users. As Richard puts it, “It’s important to be upfront with the merchant and set clear expectations.”
If someone needs to accept credit cards ASAP and you’re working with a processor that has long lead times, then you need to let the customer know, so they can make an informed decision on whether or not to move forward.
That said, if you know that you’ll be working with people that want to get up and running right away (and these days, who isn’t?), see to it that your payments partner is able to deliver.
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Final Words
Adding payments to your current SaaS offerings can create a win-win situation for you and your customers. Users get more out of your platform and can access more features, while your business sees higher revenues and lower churn.
Stax Connect offers a fully managed payments facilitation ecosystem for SaaS and ISVs. We make it easy to monetize payments thanks to our robust platform and tailored revenue-share models. Stax Connect can integrate with your software quickly so you can start offering payments on your schedule.
Quick FAQs about Merchant Underwriting Process
Q: What is the Merchant Underwriting Process?
Merchant underwriting is the risk level assessment process that an acquiring bank carries out on every new merchant before they grant them a merchant account. This process involves checking if new merchants meet the guidelines set by the bank and card brands. It’s essential for businesses that want to accept electronic payments such as those made via credit and debit cards.
Q: Why do SaaS companies need to understand the Merchant Underwriting Process?
For SaaS companies offering payment processing services, understanding the merchant underwriting process is crucial. It helps them to assist their clients better in setting up merchant accounts, facilitating a smoother onboarding process, and ultimately increasing software adoption rates.
Q: How can SaaS companies streamline the Merchant Underwriting Process for their clients?
SaaS companies can streamline the underwriting process by partnering with a payment facilitator (PayFac) like Stax. This avoids the need for the SaaS company to integrate their software with gateways and banks, undergo thorough merchant underwriting, and submit large amounts of documentation. The PayFac handles these aspects, making the software more comprehensive for the clients.
Q: What factors are considered during the Merchant Underwriting process?
During the merchant underwriting process, several factors about a business are considered. These include the type of products and services offered, industry risk, transaction size and volume, chargeback volume, and billing policies. SaaS companies can help their clients understand these factors and gather the required information to simplify the underwriting process.
Q: How can SaaS companies improve their payment funnels?
SaaS companies can improve their payment funnels by understanding the two key components: payments attachment (when users first enroll in payments), and payments processing (when they actually start processing). This understanding aids in identifying the right time and place in the software to prompt users to sign up for payments and initiate transactions.
Q: What are some best practices for SaaS companies to streamline the Merchant Underwriting Process?
Best practices include understanding the payments funnel in SaaS, familiarizing yourself with the payments underwriting process and requirements, leveraging data from your platform, customizing your payments application, and being upfront about approval estimates. These practices can help SaaS companies streamline the underwriting process for their clients.
Q: What role does a PayFac like Stax play in the Merchant Underwriting Process?
A PayFac like Stax can simplify the merchant underwriting process. Businesses can work with Stax instead of opening their own merchant account, meaning only the PayFac needs a merchant account. This approach is particularly beneficial for SaaS providers, who can offer payment processing options to clients using their software for other business tasks.
