By max April 12, 2024
Starting your business as a collection agency can be quite overwhelming. Most payment processors consider the industry to be high-risk. This explains why most merchant service providers and banks are reluctant to work with debt collection agencies. Getting approved for a merchant account is already quite a challenge for businesses in this industry. It gets trickier if you are new in the business and have no processing history to prove your credibility to the processor.
If you think you can work without a payment processor, that would mean losing your prospects to your competitors, as most of them prefer credit card transactions. Processing such transactions requires a merchant account with a reliable payment processor. So, how do you ensure a smooth and seamless payment processing experience for your customers despite the risk status? Is there a merchant service provider who works with debt collection agencies? If so, are they reliable? We are going to answer all your questions in this post.
So, are you a collection agency? Whether you are a newcomer looking for a merchant account or an established business with a good processing history looking to switch your payment service provider, this post has you covered. Let’s take a look at the tips for getting a merchant account for your high-risk debt collection business.
What is a Collection Agency?
A vast majority of Americans pay their bills with borrowed money. They get loans from traditional banks or use credit cards to pay for most of the luxury stuff. However, with the use of credit cards and other borrowed payment methods on the rise, it’s normal for people to miss out on these payments. Banks and private lenders often hire debt collection agencies to recover their money from such debtors.
Simply put, a collection agency is a business that chases debtors who have overdue bills. The job of a collection agency is quite risky, as they are supposed to recover money from lenders who might be financially struggling, have gone bankrupt, or have defaulted on the payment. Obtaining their information and using legal ways to get the money back is not only tedious but can be overwhelming.
These agencies charge a fixed percentage of the recovered money to the creditors. In other words, the company or the bank that hires a collection agency to recover their outstanding bills will have to pay a portion of the recovered amount (around 25-30 percent) to these agencies.
Why Are Collection Agencies Considered High-Risk?
Banks often look at collection agencies as high-risk merchants because of the nature of the business, the high chargeback ratio, and the possibility of legal issues. There are quite a few reasons that make these agencies high-risk. Let’s explore them.
Reputational Risks
A debt collection agency specializes in recovering money that banks, financial institutions, and private moneylenders have been unable to recover. These agencies are usually seen as the last resort to getting the pending bills paid.
When the bank has tried all possible ways to get the lender to repay the outstanding amount but failed, they will turn to a collection agency for a quick recovery. These companies might use illegal, unethical, and wrong ways of debt recovery. That’s why they are associated with reputational risks. Even if you run a legal collection agency business and use legitimate ways to collect money from debtors, the nature of your business brings a certain level of reputational risk.
Financial Risk
A collection agency also experiences financial risk. It’s never certain whether the agency will be able to collect money from the debtor. If the debtor is declared bankrupt or is financially struggling to the point that they can’t make timely payments or repay the outstanding amount in full, the collection agency won’t make any income. That’s because these agencies are paid only when they successfully collect the amount in question. It’s a highly volatile industry. Even the best collection agency might struggle to recover the unpaid bills from debtors.
Security Risk
Debt collection agencies are supposed to implement the best security protocols to prevent data breaches. They hold the debtors’ sensitive and confidential information, which is why it’s important that they have the best technology in place to mitigate the risk of security violations. Because they have a considerable volume of sensitive data, they are often the target of cybercriminals. If a breach occurs, the agency would lose trust and experience reputational damage.
Legal Issues
Another reason why debt collection agencies are considered high-risk is the possibility of legal issues in their operations. A collection agency might use fair practices to collect the outstanding amount from debtors, but if the debtor feels threatened or harassed by these agencies, they can file a complaint against them. Banks that work with collection agencies will also be exposed to legal risks. Besides, there’s a chance these professionals might unknowingly use illegal ways to recover money from debtors. This can put them out of business and cause a significant legal penalty.
In addition, some debtors might pay the collection agency their overdue bills through credit cards only to issue a chargeback later. Just to get a short relief from continuous pressure, these debtors might use other unethical tricks to repay the debt. Filing a chargeback might result in a significant loss for the collection agency as well as the creditor. Even if they successfully dispute the chargeback, they might end up paying fees or wasting time in fighting the chargeback.
All in all, a collection agency, no matter how reputable or established the organization is, will be seen as a risky business. A merchant service provider or a processing bank will have a rigorous screening of the merchant application for such merchants. Some banks will reject your merchant account application straight away, while others might charge a hefty processing fee and implement an upfront reserve requirement. In either case, the collection agency has to struggle to have their merchant account approved.
How to Get a Merchant Account for Your Collection Agency?
Getting a merchant account for a collection agency can be tricky. As mentioned previously, the process gets even more challenging if you don’t have a reliable payment processing history to show your trustworthiness.
That said, many high-risk merchant service providers are willing to offer services to collection agencies, given that they meet their eligibility criteria. Make sure you go through their terms and conditions and each clause in the contract thoroughly before finalizing the service. The last thing you want is to open a merchant account with a payment processor who imposes a hefty termination fee for early termination or a processor who charges a considerable amount of hidden fee every month.
Here’s what to consider when selecting your payment processor:
Fast Application Approval
The riskier the business appears, the longer the merchant account approval process gets. From the payment processor’s perspective, working with a collection agency means bearing risk. We’ve discussed the reputational, financial, legal, and other types of risks that your industry is associated with.
So, it’s obvious that a processor will evaluate your records and have a rigorous application approval process in place to ensure they are working with a reliable collection agency. That said, it shouldn’t take them more than a week to approve your account application. Look for someone who offers fast approval and helps you set up your merchant account and start accepting credit card payments right away.
High Approval Rate
While researching, check the payment processor’s merchant account approval rate. Some processors have an approval rate as high as 98% for high-risk merchants. Host Merchant Services and PaymentCloud, for example, are the best in the industry for debt collection agencies and other high-risk merchants. With the highest application approval rate and a simple application process, they accept most merchants.
Minimal Reserve
Banks and payment processors protect themselves from the risk of working with a high-risk merchant by implementing a reserve requirement. Reserve serves as a safeguard that protects the processor in the event of a financial loss, a sudden surge in the merchant’s chargeback ratio, a sudden business closure, and an unexpected fraudulent transaction. Basically, all types of financial losses are covered by the reserve.
Should anything unusual occur, your processor can have peace of mind knowing that there’s sufficient to reserve to compensate for the loss. However, the merchant is supposed to hold a reserve balance, which can be up to 100% of their approved transaction volume. If you keep a rolling reserve, you will be required to keep a small percentage of your monthly income (5-20 percent) aside for the reserve balance. No need to worry, as it’s still your money and will be credited back to your merchant account over time. However, if you don’t have sufficient funds for the reserve, you can always compare payment processors based on their reserve requirements.
Reasonable Processing Rates
Most payment processors serving the high-risk industry do not disclose their processing rates. You get a custom quote based on your industry type, processing volume, and other factors. Simply put, the processor will evaluate your processing history and consider your risk factor before quoting a processing fee.
A business with a high chargeback ratio and a poor processing history will be quoted a high processing fee, as that’s how the processor will offset their risk of working with you. However, it’s important to research and compare the processing rates offered by different processors. You might find someone offering excellent services with premium support and advanced security tools at comparatively lower rates than their competitors.
No Hidden Fees
A payment processor can implement fees other than the standard processing rate. This fee is disclosed in the contract. You must go over the contract clauses, especially the fee section, to understand what you’ll be paying every month. Now, not all processors charge the miscellaneous fee, but if they do, you must calculate and compare it with other processors before signing up for their processing plan.
A reliable payment processor will disclose their fee structure when quoting the processing rate. They will offer 100% transparency in pricing to ensure that you don’t get a surprising bill. Here are the types of fees a payment processor might charge:
- Payment Gateway fees
- PCI compliance fees
- Transaction fee
- Chargeback and refund fee
- Integration fee
- Batch processing fee
- Monthly fees
- Account termination fees
Review their fee requirements to ensure you won’t be paying any unnecessary fees.
Fast Funding
Payment processors use batch processing to transfer approved credit card transactions to your merchant account at once. How soon your income is reflected in your bank account varies depending on your bank’s processing time.
Some processors might take 3-4 business days to transfer credit card payments to your account, while others offer next-day or same-day funding options. The sooner the payment is processed, the better your cash flow. If you can’t wait for days for your payments to be transferred, you can find a processor who offers next-day funding to high-risk merchants.
Hardware Options
Banks usually work with third-party point-of-sale system providers to offer retailers the best-in-class hardware equipment. If you have a retail setup, you must ask your processor about your hardware options and choose the one that offers everything you need to process all kinds of payments at your brick-and-mortar and online store.
The hardware includes a full-fledged POS station, a portable card reader, a receipt printer, a barcode scanner, a cash register, and so on. Some also offer free EMV terminals. You must compare the hardware options and prices to ensure you are getting the best.
Complete Processing
A collection agency that works internationally must choose a payment processor that accepts international transactions and offers a broad range of payment methods. When comparing payment processors, check the accepted payment methods. They should accept all major credit/debit cards and other forms of payment, such as ACH transfers, eChecks, digital wallets, and more. Some processors also accept cryptocurrency transactions. The more payment options you get, the better.
Excellent Support
Ideally, you should look for a merchant service provider that offers 24/7 support. However, not every payment processor is available outside business hours. Some offer support during business hours, while others have outsourced the support department to IT service providers, thus ensuring round-the-clock support service. Reaching out to support might be a little problematic if you hire an international payment processor who operates according to their region’s time zone.
In addition to the support hours, you should research and evaluate the professionalism of their support team, their qualification, experience, and how well they handle technical and non-technical issues. You don’t want to work with a processor who’s unavailable when your POS system has broken down, and you are unable to process credit card payments. Likewise, if anything goes wrong with your payment gateway or other credit card processing terminals, having the issue resolved as soon as possible will be your priority. So, look for a team that offers prompt support and is always available to assist you.
Some payment processors use FAQs and knowledge bases to allow customers to resolve their general issues quickly without the professional’s assistance. Check what level of support service they offer and what communication channels they have. Do they offer support via email, live chat, ticketing system, phone, and other channels? The more, the merrier.
Chargeback Assistance
One of the common challenges that a collection agency faces is the increased risk of a high chargeback ratio. As mentioned earlier, there’s a possibility a debtor might repay their outstanding bills or the debt owed to the bank using their credit cards, and they might issue a chargeback later.
If these chargeback requests are not addressed, the debtor might win the chargeback and get all their repaid amount back. This can result in a significant financial loss for the collection agency. To mitigate these risks, high-risk merchant accounts that serve collection agencies integrate the best chargeback management and protection plans into their security system. Processors use state-of-the-art technology that can detect suspicious activities, alert the merchant, and help fight illegitimate chargeback requests. This helps prevent friendly fraud. Look for a payment processor who has a robust chargeback protection plan in place.
FAQs
Why does a collection agency need a merchant account?
Some debtors prefer paying their outstanding bills through credit cards. A collection agency should set up a merchant account to be able to process credit card transactions.
How can a collection agency improve its chances of getting approved for a merchant account?
Getting a merchant account is more difficult for a collection agency than it is for regular merchants. Because they are classified as high-risk businesses, it’s important for them to maintain a good processing history and improve their credit score to get a merchant account.
Do collection agencies need to pay a high processing fee?
In some cases, a collection agency pays higher than the regular processing fee because of the risk they carry. There might be additional fees, such as monthly processing fees or chargeback fees, to mitigate the financial risk associated with this industry.