Debt is a common feature of our economy as so many Americans carry some form of debt. Whether the debt is due to credit cards, student loans, medical bills, or something else, the parties that people are indebted to will be seeking repayment. Typically, this is done through a collection agency.
Collection agencies act on behalf of creditors to try and recover unpaid debts. Agencies that buy debt from creditors and then try to collect repayment also fall under this category. The debt collection industry is worth around $18 billion, but despite this high revenue, debt collection is considered a high-risk business.
Debt collection is considered a high-risk industry due to several reasons. The industry in general has a negative reputation as some collection agencies resort to unsavory methods to collect repayment from debtors. There are also inconsistent legal requirements and regulations and a high risk of unreliable income. Traditional banks and payment processors likely will not work with a collection agency for these reasons, but it is still important for collection agencies to have reliable merchant services to be able to collect repayment. It is beneficial for collection agencies to get merchant services from a professional that has experience working with businesses in the debt collection industry.
In this guide, we will discuss why debt collection is considered a high-risk industry as well as what businesses within this industry can do to get merchant account services from a trusted provider. First MCS provides merchant services for hard to place merchant accounts in the Chicago, IL area and we have experience working with businesses in the debt collection industry.
Why is Debt Collection Considered High-Risk?
Despite the large revenue of the debt collection industry, traditional banks and payment processors consider this industry high-risk. The main reason traditional merchant service providers do not want to work with collection agencies is because of the reputation and history of unethical collection methods within the industry. There is also a high risk of chargebacks from debtors who dispute the amount of money they owe.
The following are the main reasons the debt collection industry is considered high-risk:
- Reputation: The debt collection industry is necessary to collect on outstanding debts, but the industry does have a negative reputation. Some debt collectors use intimidation and scare tactics to harass debtors into making payments. This contributes to a negative public perception of the industry as a whole.
- Unstable regulation: The debt collection industry is heavily regulated, but there is a level of uncertainty surrounding the regulation. The industry is subject to federal regulation from the Fair Debt Collection Practices Act (FDCPA) and the Consumer Financial Protection Bureau (CFPB). There are also state level regulations and legal requirements that differ from state to state. The heavy federal regulation and differing rules between states is enough to turn away traditional banks and payment processors.
- Unreliable streams of income: The income of collection agencies relies heavily on their ability to successfully collect payments from debtors. The problem is that people who are in debt often do not want to pay their debts and will also dispute payment amounts. This makes it difficult for collection agencies to establish a steady revenue stream.
- Chargebacks: Chargebacks are another issue that put the debt collection industry in the high-risk category. Chargebacks occur when people dispute the validity of the payment amount or of the debt itself and request a refund from their bank or credit card. High chargeback rates quickly scare off traditional banks and payment processors.
How to Get a Merchant Account for Your Debt Collection Agency
The debt collection industry may be considered high-risk but there are payment processors such as First MCS that can work with businesses with hard to place merchant accounts. By taking the following actions, you can improve your chances of getting merchant account services for your debt collection business:
- Buy business insurance: Businesses in the debt collection industry must adhere to state insurance requirements. Make sure you have businesses insurance that is in accordance with laws within the state in which you operate. You should also get professional liability insurance to help protect from claims of negligence and lawsuits which are common for collection agencies.
- Register your business: You must register your business with your state and obtain an Employer Identification Number (EIN). This gives your business legitimacy in the eyes of the state.
- Obtain a license: Some states require collection agencies to obtain a collection agency license. If you operate within a state that requires such a license, make sure you get one for your business to be in compliance with the law.
- Reduce chargebacks: Payment processors like First MCS have a slightly higher tolerance for chargeback ratios than traditional payment processors, but they still prefer to work with businesses that are making an effort to reduce chargebacks. You will need to show proof of your chargeback ratio to merchant service providers and inform them of the actions you are taking to reduce chargebacks.
- Have a functional and secure website: Businesses within this industry collect the majority of their payments online. This means that your collection agency must have a functional and secure website that can be accessed 24 hours a day. Payment processors will be more willing to work with your business and provide payment gateway solutions for online payments if you have a secure and functional website.
- Establish financial stability: Payment processors are more likely to work with businesses that can establish financial stability. You will need to present several months’ worth of financial statements to prove that your business has a strong, steady income.
Hard to Place Merchant Account Services from First MCS
Debt collection is a necessary industry that generates billions in annual revenue. However, the nature and reputation of the industry puts it in the high-risk category which makes it difficult for collection agencies to secure merchant account services. Businesses in this industry can still get reliable merchant account services from a payment processor like First MCS.
First MCS provides hard to place merchant account services for debt collection agencies and other businesses in high-risk industries. We can provide virtual terminals and gateways that allow debt collection agencies to safely process online payments. You can expect 24/7 support from our staff to quickly address any issues you may have and minimize the downtime of your payment processing system.
To learn more about how First MCS can help businesses in the debt collection industry, call us at (866) 673-3099.