In the payments business, underwriting is the process of evaluating and validating potential customers – involving brand, adherence to banking, and governmental standards – in order to safeguard consumers from companies that seek to use credit cards to commit fraud or other criminal acts. This is necessary in order to maintain a secure payment ecosystem that protects everyone’s money and well-being.
Before allowing a new customer to begin accepting electronic payments, a payment facilitator or other payments organization must first verify that the merchant is a legitimate business that is not involved in any criminal activities.
Let us first look at the Two Golden rules that need to be followed in case of Underwriting or On-boarding any Merchant:
- Ability to run his own business.
- Intentions and Ethics/Principles of the Merchant.
In case, these two golden principles are followed by any merchant, he can be on-boarded by an aggregator. But the question remains how to decide one’s intentions and ability as these are qualitative factors and it is very difficult to gauge one’s ability and intentions. So what should be done to decide the intentions and ability?
Well, underwriting is basically combination of Understanding following two factors:
- Qualitative Factors – To get the deep understanding about the Business Model & the industry in which the business operates.
- Quantitative Factors – Financial Analysis.
How to Underwrite?
Let us understand one by one:
- Qualitative Factors:
Qualitative Factors refers to understanding what exactly the business is and what is the promoters’ background? There are number of ways an underwriter can have an idea about it, however answers to the following are the basic:
- Background of Promoters, how they got into the business?
- Are they educationally and technically qualified for the business?
- How business is placed in the market?
- Location of Primary place of business. Eg Industrial Area, Commercial Area or Residential Area.
- What is the market standing of merchant compared to its competitors?
- What are the future plans of the promoters?
- What is the team size and team composition at all the levels of an organisation e.g At top management, middle management and at execution level.
- Political Scenarios/ Government Policies affecting the business?
- Technological know-how adopted by the business and possible threats regarding technological upgradations etc.
- A detailed SWOT Analysis.
A detailed conversation at the Principal Place of Business can help underwriters take easy and quick decisions as he can easily see the operations of the business.
Analysis of Digital Presence (Website or an Application):
In this digital era, it is very common practice to have your own website/Application. A smallest of the organisation can afford to have a basic website or an Application. Here, a merchant can market himself as well as his business. Any person sitting anywhere in the world can have a look at the digital presence of the Merchant and can establish the business relationship.
This goes true with the Merchant onboarding process too. An underwriter can also check and analyse the Website or an App of the Merchant and can have the basic understanding of the business of the Merchant. Following can be looked by an Underwriter:
About Us:
This section gives an idea of what business the merchant is engaged into. What are the services offered by the merchant, how long the merchant is into the business etc.
Terms & Conditions:
This gives an idea about the broad terms and conditions a merchant follows for his business. Clients are supposed to be aware of these terms and conditions. Clients need to be aware of what are the terms and conditions in case the services are availed. In the absence of Terms and Conditions, there can be conflicts between the Merchant and his clients as there are no specific communication in this regard.
An underwriter must look into the broad terms and conditions that a merchant follows. These terms and conditions should be generally accepted in nature and gives clear idea about possibilities and outcomes in case of certain events.
Privacy Policy:
A merchant must disclose privacy policy about the data it obtains from the users of the website. A merchant should disclose following:
- What kind of data is going to be collected from the user of the website,
- How this data will be collected,
- Where the collected data will be used,
- How and where it will be shared,
- Responsibilities in case of shared data etc.
Return/Refund/Cancellation Policy:
It is possible that the client is not satisfied about the product or service he has received from the Merchant. In such cases, the product or service needs to be returned and appropriate amount is refunded to the client. But how it is to be decided?
A merchant should clearly disclose his Shipping Policy if any as well as return/refund/cancellation policies on its website so that the user understands that in case the product or service becomes unacceptable what are the resources available to him? If these are acceptable to the user of the website then and only then the product or service should be availed.
Contact Us:
Contact Us details are important to understand the physical presence of the merchant. Contact details can be any or all of the following:
- Registered Business Address
- Principal place of business in case same is different from Registered Business Address
- Contact Number
- Email id
By displaying all these policies, the merchant shows the transparency of the business as well as his own accountabilities in happening of certain events. Definitely, the presence of these policies gives underwriters an assurance about the intentions of the merchant as well as the quality of the merchant.
2. Quantitative Factors:
- Analysis of Audit Reports and Financial Forecast of the Organisation and deep diving into the financial analysis like:
- Turnover trend over past years.
- Line by line analysis of Expenses – Analysing any significant drop or increase in the particular line of expense, reason thereof
- Trend of GP, NP over the years.
- Amount of Capital invested in the business
- Debt position – Sudden rise or fall in the debt levels and reasons thereof
- Overall lending position – be it Secured Borrowing or Unsecured Borrowing
- Receivables and Payables position of the business
- Assets of the business – Amount of Capex incurred in recent years, expected Capex investment over the future years and how the investment will yield the return to the business.
- Cash flow statement Analysis
- Some basic ratio analysis – Debt Equity Ratio, DSCR, Interest Coverage Ratio, inventory turnover, Receivables and Payables Turnover, Asset Turnover etc.
- Banking Transactions Analysis:
- Detailed banking analysis gives a good insight how the money is routed in and out of business.
- It gives an idea to the analyst/underwriter that from where the money comes into the business and where it is going out of the business.
- Repayment Track Record:
- If the merchant is genuine then he will be honest and regular in repaying his debt. There are number of ways, repayment track can be checked. These are
- From Bank statement
- CIBIL Or Any Government Agency report which shows debt obtained and its repayment
- Statement of Account (SOA) from the lending institutions.
- If the merchant is genuine then he will be honest and regular in repaying his debt. There are number of ways, repayment track can be checked. These are
