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Merchant underwriting PAYMENT OPERATIONS STARTED LIVE 01 Merchant underwriting - process by which an acquirer decides whether ACTIVE 02 Financial Conduct Authority in the United - card schemes both require QUEUED 03 Underwriter verification - Second, the checks: the underwriter verifies QUEUED 04 Conditional approval - underwriter approves with conditions: a 10 QUEUED 05 Operational and accounting implications - underwriting team must maintain a QUEUED 06 Underwriting takeaway - acquirer risk decision QUEUED Merchant underwriting is the process by which an acquirer decides whether to accept a merchant Step 1 of 6 Merchant underwriting STARTED Merchant underwriting process by which an acquirer decides ACTIVE Financial Conduct Authority in the United card schemes both require acquirers to have QUEUED Underwriter verification Second, the checks: the underwriter verifies QUEUED Conditional approval underwriter approves with conditions: a 10 QUEUED Operational and accounting implications underwriting team must maintain a risk QUEUED Underwriting takeaway acquirer risk decision QUEUED Merchant underwriting is the process by which an acquirer decides whether to accept a merchant
Financial Conduct Authority in the United Kingdom PAYMENT OPERATIONS IN PROGRESS LIVE 01 Merchant underwriting - process by which an acquirer decides whether DONE 02 Financial Conduct Authority in the United - card schemes both require ACTIVE 03 Underwriter verification - Second, the checks: the underwriter verifies QUEUED 04 Conditional approval - underwriter approves with conditions: a 10 QUEUED 05 Operational and accounting implications - underwriting team must maintain a QUEUED 06 Underwriting takeaway - acquirer risk decision QUEUED The Financial Conduct Authority in the United Kingdom and the card schemes both require acquirers to have a documented underwriting process Step 2 of 6 Financial Conduct Authority in the United Kingdom IN PROGRESS Merchant underwriting process by which an acquirer decides DONE Financial Conduct Authority in the United card schemes both require acquirers to have ACTIVE Underwriter verification Second, the checks: the underwriter verifies QUEUED Conditional approval underwriter approves with conditions: a 10 QUEUED Operational and accounting implications underwriting team must maintain a risk QUEUED Underwriting takeaway acquirer risk decision QUEUED The Financial Conduct Authority in the United Kingdom and the card schemes both require acquirers to have a documented underwriting process
Underwriter verification checks PAYMENT OPERATIONS IN PROGRESS LIVE 01 Merchant underwriting - process by which an acquirer decides whether DONE 02 Financial Conduct Authority in the United - card schemes both require DONE 03 Underwriter verification - Second, the checks: the underwriter verifies ACTIVE 04 Conditional approval - underwriter approves with conditions: a 10 QUEUED 05 Operational and accounting implications - underwriting team must maintain a QUEUED 06 Underwriting takeaway - acquirer risk decision QUEUED Second, the checks: the underwriter verifies the company against the registry, screens the directors Step 3 of 6 Underwriter verification checks IN PROGRESS Merchant underwriting process by which an acquirer decides DONE Financial Conduct Authority in the United card schemes both require acquirers to have DONE Underwriter verification Second, the checks: the underwriter verifies ACTIVE Conditional approval underwriter approves with conditions: a 10 QUEUED Operational and accounting implications underwriting team must maintain a risk QUEUED Underwriting takeaway acquirer risk decision QUEUED Second, the checks: the underwriter verifies the company against the registry, screens the directors
Conditional approval example PAYMENT OPERATIONS IN PROGRESS LIVE 01 Merchant underwriting - process by which an acquirer decides whether DONE 02 Financial Conduct Authority in the United - card schemes both require DONE 03 Underwriter verification - Second, the checks: the underwriter verifies DONE 04 Conditional approval - underwriter approves with conditions: a 10 ACTIVE 05 Operational and accounting implications - underwriting team must maintain a QUEUED 06 Underwriting takeaway - acquirer risk decision QUEUED The underwriter approves with conditions: a 10 percent rolling reserve held for 180 days, settlement delayed by seven days, and a monthly volume cap of GBP 500,000. Step 4 of 6 Conditional approval example IN PROGRESS Merchant underwriting process by which an acquirer decides DONE Financial Conduct Authority in the United card schemes both require acquirers to have DONE Underwriter verification Second, the checks: the underwriter verifies DONE Conditional approval underwriter approves with conditions: a 10 ACTIVE Operational and accounting implications underwriting team must maintain a risk QUEUED Underwriting takeaway acquirer risk decision QUEUED The underwriter approves with conditions: a 10 percent rolling reserve held for 180 days, settlement delayed by seven days, and a monthly volume cap of GBP 500,000.
Operational and accounting implications PAYMENT OPERATIONS IN PROGRESS LIVE 01 Merchant underwriting - process by which an acquirer decides whether DONE 02 Financial Conduct Authority in the United - card schemes both require DONE 03 Underwriter verification - Second, the checks: the underwriter verifies DONE 04 Conditional approval - underwriter approves with conditions: a 10 DONE 05 Operational and accounting implications - underwriting team must maintain a ACTIVE 06 Underwriting takeaway - acquirer risk decision QUEUED The operational and accounting implications are that the underwriting team must maintain a risk register Step 5 of 6 Operational and accounting implications IN PROGRESS Merchant underwriting process by which an acquirer decides DONE Financial Conduct Authority in the United card schemes both require acquirers to have DONE Underwriter verification Second, the checks: the underwriter verifies DONE Conditional approval underwriter approves with conditions: a 10 DONE Operational and accounting implications underwriting team must maintain a risk ACTIVE Underwriting takeaway acquirer risk decision QUEUED The operational and accounting implications are that the underwriting team must maintain a risk register
Underwriting takeaway PAYMENT OPERATIONS COMPLETE LIVE 01 Merchant underwriting - process by which an acquirer decides whether DONE 02 Financial Conduct Authority in the United - card schemes both require DONE 03 Underwriter verification - Second, the checks: the underwriter verifies DONE 04 Conditional approval - underwriter approves with conditions: a 10 DONE 05 Operational and accounting implications - underwriting team must maintain a DONE 06 Underwriting takeaway - acquirer risk decision ACTIVE Takeaway: underwriting is the acquirer risk decision, and the reserve and the settlement delay are the price of that risk. Step 6 of 6 Underwriting takeaway COMPLETE Merchant underwriting process by which an acquirer decides DONE Financial Conduct Authority in the United card schemes both require acquirers to have DONE Underwriter verification Second, the checks: the underwriter verifies DONE Conditional approval underwriter approves with conditions: a 10 DONE Operational and accounting implications underwriting team must maintain a risk DONE Underwriting takeaway acquirer risk decision ACTIVE Takeaway: underwriting is the acquirer risk decision, and the reserve and the settlement delay are the price of that risk.

Key points of this lesson, in order.

0:00 / 6:14 Step 1 of 6

Merchant underwriting: MCC, KYB and risk rating

Cards compliance and acquiring, Lesson 3 of 8, Narration 6:14, D08 Cards and alternative payments

ChargebackSettlementAcquirer

What you will learn

Your objective. By the end of this lesson, you will be able to explain merchant underwriting: mcc, kyb and risk rating and apply it to a real banking scenario.

Why it matters. For a business analyst, underwriting is a workflow and rules subject.

Chapter objective: EMV, PCI DSS, merchant underwriting, interchange modelling and the chargeback chain

Key learning points

  • Merchant underwriting
  • Financial Conduct Authority in the United Kingdom
  • Underwriter verification checks
  • Conditional approval example
  • Operational and accounting implications
  • Underwriting takeaway

Key terms

Chargeback: A dispute raised by a cardholder through the issuer to reverse a card payment, for example for fraud, non delivery or a duplicate charge.

Settlement: The final movement of funds between banks to discharge obligations created by cleared payments. Settlement is usually made in central bank money or through correspondent accounts.

Acquirer: A bank or licensed institution that processes card payments for merchants and receives transaction funds from card schemes on their behalf.

Payment flow diagram showing Merchant underwriting: MCC, KYB and risk rating.

Practise this lesson

Exercise

Trace the card payment in this lesson through authorisation, clearing and settlement.

Use the four-party model and the stage timings in this lesson.

  1. What to do. State what happens at each stage, who pays whom, and when the merchant is actually credited.

Correct result. Authorisation holds the funds and returns a response code. Clearing sends the transaction in a batch file. Settlement moves the net amount between banks, and the acquirer credits the merchant after deducting interchange, scheme fees and its margin.

Why. A card payment is not one event. The customer sees it on Monday, the merchant gets it on Wednesday, and the difference is the clearing and settlement cycle.

Check your understanding

Practice question

Which of the following best describes merchant underwriting: mcc, kyb and risk rating?

Takeaway and next step

What to remember

For a business analyst, underwriting is a workflow and rules subject.

Follow GBP 500,000 through every stage, from instruction to beneficiary credit, and note where it can stop.

Open the Payment Lifecycle Simulator →

Builds on "PCI DSS: what it requires and who it applies to".

Transcript and full text

Show transcript

Merchant underwriting is the process by which an acquirer decides whether to accept a merchant, what risk that merchant presents, and what terms to offer, and it is the gate that controls who can take card payments. The acquirer is taking a risk: if the merchant fails to deliver goods or goes bankrupt, the acquirer may have to refund the cardholders, and if the merchant is fraudulent, the acquirer bears the loss. Underwriting is therefore a risk assessment, not a sales process, and it is governed by the scheme rules, by anti-money laundering regulations, and by the acquirer own risk appetite. A merchant that is underwritten badly can cost the acquirer far more than it ever earns in fees. Why underwriting matters is that the acquirer is liable for the merchant. When a cardholder pays a merchant and the merchant does not deliver, the cardholder can raise a chargeback, and if the merchant cannot pay, the acquirer must. This is why acquirers hold reserves, delay settlement, or require a rolling reserve from risky merchants. The underwriting process estimates the probability of that loss and prices it into the merchant discount rate, the reserve, and the settlement delay. The Financial Conduct Authority in the United Kingdom and the card schemes both require acquirers to have a documented underwriting process, and a failure to follow it can result in regulatory action. The parties are the merchant, the acquirer, the scheme, and the underwriting team. The merchant provides its business details, its financial statements, its website, and its processing history. The underwriter checks the Merchant Category Code, known as the MCC, which classifies the business type, and checks whether the MCC is on the acquirer prohibited or restricted list. The underwriter also performs KYB, Know Your Business, which verifies the company registration, the directors, the beneficial owners, and the source of funds, as required by anti-money laundering regulations. The underwriter then assigns a risk rating, which determines the reserve, the settlement timing, and the monitoring. In practice the underwriting follows a standard sequence. First, the application: the merchant provides its company details, its trading history, its expected monthly volume, its average transaction value, and its chargeback history. Second, the checks: the underwriter verifies the company against the registry, screens the directors and beneficial owners against sanctions and adverse media, and checks the website for prohibited goods or misleading claims. Third, the risk assessment: the underwriter considers the MCC risk, the business model, the delivery timescale, and the financial strength. A merchant selling digital goods with instant delivery is lower risk than a merchant selling furniture with a twelve-week delivery time, because the longer the delivery time, the longer the chargeback window. Fourth, the decision: approve, approve with conditions such as a reserve or delayed settlement, or decline. A worked example shows the risk rating. A travel agent applies for card acceptance with expected monthly volume of GBP 500,000 and an average transaction value of GBP 800. Travel is a high-risk MCC, because customers pay months in advance and the service may not be delivered if the agent fails. The underwriter checks the company accounts, which show GBP 200,000 of net assets, and the chargeback history, which shows 0.8 percent. The underwriter approves with conditions: a 10 percent rolling reserve held for 180 days, settlement delayed by seven days, and a monthly volume cap of GBP 500,000. The reserve of GBP 50,000 per month protects the acquirer if the agent fails, and the seven-day delay gives the acquirer time to detect a problem before the money is paid out. What happens when underwriting fails is a loss, and the loss is usually large. If a merchant is approved without proper checks and turns out to be fraudulent, the acquirer may face thousands of chargebacks with no merchant to pay them. If a merchant is approved with too low a reserve and then fails, the acquirer must cover the shortfall from its own capital. The scheme may also fine the acquirer if its chargeback ratio exceeds the scheme threshold, which is typically 1 percent for Visa and 1.5 percent for Mastercard, and if the ratio stays above the threshold the acquirer may lose its ability to board new merchants in that MCC. The operations team must monitor the chargeback ratio continuously, because a rising ratio is the earliest warning that underwriting has failed. The operational and accounting implications are that the underwriting team must maintain a risk register, the operations team must monitor the merchant portfolio, and the finance team must manage the reserves. On the ledger, a rolling reserve is a liability of the acquirer to the merchant, and it must be released on schedule. A chargeback is a debit to the merchant account, and if the merchant account is empty, it becomes a loss for the acquirer. The accounting team must also track the scheme fines, which are a real cost, and the risk team must report the portfolio chargeback ratio to the board every month. For a business analyst, underwriting is a workflow and rules subject. You must specify the application form, the checks, the risk scoring model, the decision matrix, the reserve calculation, the settlement delay rules, and the monitoring thresholds. You must also specify the periodic review: high-risk merchants are reviewed at least annually, and any merchant whose chargeback ratio exceeds the threshold must be reviewed immediately. A common gap is failing to specify the exit procedure, which is what the acquirer does when it decides to terminate a merchant, including the notice period, the reserve release schedule, and the handling of outstanding chargebacks. Takeaway: underwriting is the acquirer risk decision, and the reserve and the settlement delay are the price of that risk. Further reading: the Financial Conduct Authority guidance on merchant acquiring; the Visa rules on merchant underwriting; the Mastercard rules; the UK Money Laundering Regulations for KYB. Last reviewed 7 November 2026. An acquirer that prices the risk wrong will either lose the merchant to a cheaper competitor or lose money on the chargebacks.

Merchant underwriting is the process by which an acquirer decides whether to accept a merchant, what risk that merchant presents, and what terms to offer, and it is the gate that controls who can take card payments. The acquirer is taking a risk: if the merchant fails to deliver goods or goes bankrupt, the acquirer may have to refund the cardholders, and if the merchant is fraudulent, the acquirer bears the loss. Underwriting is therefore a risk assessment, not a sales process, and it is governed by the scheme rules, by anti-money laundering regulations, and by the acquirer own risk appetite. A merchant that is underwritten badly can cost the acquirer far more than it ever earns in fees.

Why underwriting matters is that the acquirer is liable for the merchant. When a cardholder pays a merchant and the merchant does not deliver, the cardholder can raise a chargeback, and if the merchant cannot pay, the acquirer must. This is why acquirers hold reserves, delay settlement, or require a rolling reserve from risky merchants. The underwriting process estimates the probability of that loss and prices it into the merchant discount rate, the reserve, and the settlement delay. The Financial Conduct Authority in the United Kingdom and the card schemes both require acquirers to have a documented underwriting process, and a failure to follow it can result in regulatory action.

The parties are the merchant, the acquirer, the scheme, and the underwriting team. The merchant provides its business details, its financial statements, its website, and its processing history. The underwriter checks the Merchant Category Code, known as the MCC, which classifies the business type, and checks whether the MCC is on the acquirer prohibited or restricted list. The underwriter also performs KYB, Know Your Business, which verifies the company registration, the directors, the beneficial owners, and the source of funds, as required by anti-money laundering regulations. The underwriter then assigns a risk rating, which determines the reserve, the settlement timing, and the monitoring.

In practice the underwriting follows a standard sequence. First, the application: the merchant provides its company details, its trading history, its expected monthly volume, its average transaction value, and its chargeback history. Second, the checks: the underwriter verifies the company against the registry, screens the directors and beneficial owners against sanctions and adverse media, and checks the website for prohibited goods or misleading claims.

Third, the risk assessment: the underwriter considers the MCC risk, the business model, the delivery timescale, and the financial strength. A merchant selling digital goods with instant delivery is lower risk than a merchant selling furniture with a twelve-week delivery time, because the longer the delivery time, the longer the chargeback window. Fourth, the decision: approve, approve with conditions such as a reserve or delayed settlement, or decline.

A worked example shows the risk rating. A travel agent applies for card acceptance with expected monthly volume of GBP 500,000 and an average transaction value of GBP 800. Travel is a high-risk MCC, because customers pay months in advance and the service may not be delivered if the agent fails. The underwriter checks the company accounts, which show GBP 200,000 of net assets, and the chargeback history, which shows 0.8 percent. The underwriter approves with conditions: a 10 percent rolling reserve held for 180 days, settlement delayed by seven days, and a monthly volume cap of GBP 500,000. The reserve of GBP 50,000 per month protects the acquirer if the agent fails, and the seven-day delay gives the acquirer time to detect a problem before the money is paid out.

What happens when underwriting fails is a loss, and the loss is usually large. If a merchant is approved without proper checks and turns out to be fraudulent, the acquirer may face thousands of chargebacks with no merchant to pay them. If a merchant is approved with too low a reserve and then fails, the acquirer must cover the shortfall from its own capital. The scheme may also fine the acquirer if its chargeback ratio exceeds the scheme threshold, which is typically 1 percent for Visa and 1.5 percent for Mastercard, and if the ratio stays above the threshold the acquirer may lose its ability to board new merchants in that MCC. The operations team must monitor the chargeback ratio continuously, because a rising ratio is the earliest warning that underwriting has failed.

The operational and accounting implications are that the underwriting team must maintain a risk register, the operations team must monitor the merchant portfolio, and the finance team must manage the reserves. On the ledger, a rolling reserve is a liability of the acquirer to the merchant, and it must be released on schedule. A chargeback is a debit to the merchant account, and if the merchant account is empty, it becomes a loss for the acquirer. The accounting team must also track the scheme fines, which are a real cost, and the risk team must report the portfolio chargeback ratio to the board every month.

For a business analyst, underwriting is a workflow and rules subject. You must specify the application form, the checks, the risk scoring model, the decision matrix, the reserve calculation, the settlement delay rules, and the monitoring thresholds. You must also specify the periodic review: high-risk merchants are reviewed at least annually, and any merchant whose chargeback ratio exceeds the threshold must be reviewed immediately. A common gap is failing to specify the exit procedure, which is what the acquirer does when it decides to terminate a merchant, including the notice period, the reserve release schedule, and the handling of outstanding chargebacks.

Takeaway: underwriting is the acquirer risk decision, and the reserve and the settlement delay are the price of that risk. Further reading: the Financial Conduct Authority guidance on merchant acquiring; the Visa rules on merchant underwriting; the Mastercard rules; the UK Money Laundering Regulations for KYB. Last reviewed 7 November 2026. An acquirer that prices the risk wrong will either lose the merchant to a cheaper competitor or lose money on the chargebacks.

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