Sponsor Banks Vary in Permitting ISOs Underwriting Authority

Navigator Edition: Merchant Acquiring Special Edition
By: Raymond Carter

For banks that sponsor ISOs, one key to success is establishing a new account approval process that strikes a delicate balance between meeting the fiduciary responsibility of mitigating risk and permitting the ISO to independently approve certain lower risk accounts in a timely fashion without bank interference. Underwriting oversight can be time consuming and costly for a sponsor bank, and the bank must be sure to optimize the risk/reward balance. First Annapolis looked at a sample of twenty sponsorship agreements to gain an understanding of the typical thresholds under which ISOs can independently underwrite new merchants without requiring specific bank approval for each account, and the results vary significantly. Often, sponsor banks set a threshold, which may be based on annual volume, credit risk exposure, or other factors, under which ISOs are permitted to approve new merchant accounts that otherwise adhere to credit policy guidelines. New merchant applications that exceed the thresholds require the approval of the sponsor bank before the merchant can begin processing.

Two of the agreements in the sample require that the bank approve all new merchant accounts, and one agreement has no stated threshold. The research indicates that those sponsor banks that do have thresholds in place (17 of 20 in the sample) range from under $1 million to $100 million in annual volume, or from $200 thousand to $25 million in credit risk exposure. Of note, there is a fairly strong correlation between the threshold level and the size of the ISO. Large ISOs have higher thresholds and small ISOs have lower thresholds. However, the thresholds for mid-sized ISOs varied from high to low and were more correlated to the size of the bank than the size of the ISO.

Volume and exposure are the two most frequently used thresholds, as depicted in Figure 1, and four sponsor relationships utilize both types in a manner such that any application package that exceeds either the volume threshold or credit exposure risk threshold required bank approval. First Annapolis views this dual threshold as a best practice. Other threshold triggers include certain high risk and prohibited merchant category codes, a high chargeback rate, and a high average ticket.

Figure 1: Frequency of Threshold Type
Fig-1_-Frequency-of-Threshold-TypeSource: First Annapolis Consulting survey and analysis.

While the sample size is relatively small, the volume thresholds used by sponsor banks strongly correlate to the size of the bank with large banks averaging $32.5 million annual volume as a threshold, medium banks in the sample averaging $15.1 million, and smaller banks just under $1 million. Note that these thresholds are for retail card present merchant applications and are materially lower at most sponsor banks in the sample for mail order/telephone order (“MOTO”) and Internet merchants. Exposure thresholds revealed a similar correlation with large banks averaging thresholds of $17.5 million, mid-sized banks under $5 million, and smaller banks at $2 million.

Of the ten agreements with volume thresholds, six had tiered thresholds, meaning the highest dollar threshold was reserved for low risk merchants and at least one other reduced tier for merchants with higher risk business models. On average, the higher threshold was 13.5 times the lower threshold, meaning if an ISO could independently sign a merchant with up to $1 million in annual higher risk card-not-present volume, they could independently sign a low risk card present merchant up to $13.5 million annual volume. The multiples ranged from four to twenty.

For more information, please contact Raymond Carter, Principal, specializing in Merchant Acquiring,

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