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Underwriting in Today's Credit Card World

By Chris Hester

Many of you might be wondering, "What exactly does an underwriting department in the credit card industry do?"

Well, I'm glad you asked.

The underwriting department works in conjunction with the risk department to assist in identifying risk exposure for the prevention of losses. It also retains and services a customer base.

Merchant underwriting and approval policies help control credit risk. Underwriting guidelines are based on a number of factors, including past experience, industry trends and forecasts, and information from law enforcement and other security organizations.

These guidelines, or policies, also outline and list what information merchants need to provide for the merchant agreement.

Today I will share with you some of the issues and concerns we face on a daily basis in underwriting and how I feel we must adapt to not only thrive but also survive in the industry today.

Internet Fraud

According to CyberSource Corp.'s sixth annual survey of online fraud, losses due to fraud will total $2.6 billion in 2004 for Internet merchants. That number is 37% higher than last year and smaller merchants will suffer the most.

The survey also casts light on other costs of fraud, including the loss of legitimate orders rejected on suspicion of fraud.

Rejection rates this year are almost 6%, up from 4.6% in the 2003 survey. This increase implies that merchants reject more than four orders for every one on suspicion that it is actually fraudulent.

Fraud management, especially manual review, is also sapping merchant profits.

In underwriting we have to be constantly cognizant of fraud attempts. Every single merchant application received has the potential to damage a company through fraudulent activity.

Some obvious examples that we see almost on a daily basis include (to name only a few):

  • Credit repair
  • Pyramids and multi-level marketing
  • Charity scams
  • Work-at-home scams
  • Travel fraud

More than ever, many credit card processing accounts are set up with the sole intention of committing fraud and reaping financial reward. If not detected, these accounts can lead to potential financial ruin for all parties involved.

Identity Theft

Identity theft struck 9.9 million Americans and cost businesses and consumers almost $53 billion last year, according to a recent Federal Trade Commission report.

Only five years ago identity theft was a street crime. Somebody would steal your wallet or look over your shoulder at an ATM to get your PIN. But using the Internet, criminals can now access thousands of identities and disperse that information to an organized network of criminals.

Recently, identity theft-related crooks have widened their scope to add credit card processing companies to their list of potential victims.

The following is a typical scenario for this type of crime: Criminals obtain stolen identity information. They open up a merchant account and process stolen credit card numbers through the account.

After they reach the dollar amount they have designated as their "target" amount, they typically vanish and are nearly impossible to locate. Stolen personal information, such as Social Security numbers, are also used in similar scenarios.

Protecting Ourselves

I conclude with the question, "How do we protect ourselves?"

In my opinion, the key factors for doing this involve awareness, which stems from constant and consistent training, and open communication between all departments and processors within the industry.

We must continually find balance in being overly cautious and providing quick turnaround time frames for approving new merchant accounts.

Our industry is highly competitive, and the focus on speedy merchant account approvals increases daily. In a processor's underwriting department, hands shuffle stacks of paper and type feverishly at keyboards. And the department fields demands coming in from all directions.

However, we must constantly remind ourselves that the less aware we allow ourselves to become the easier target we will be to criminals. The onus is on us to create and maintain this balance.

Chris Hester is Production/Underwriting Manager for Electronic Exchange Systems (EXS), a national provider of merchant processing solutions. Founded in 1991, EXS offers ISO partner programs, innovative pricing, a complete product line, monthly phone/Web training, quarterly seminars and, most of all, credibility.

For more information, visit or e-mail Chris at .
Electronic Exchange Systems is a registered ISO/MSP for HSBC Bank USA, National Association.

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