Collection agencies are one of those industries that, well, let’s just say people have a strong reaction when you tell them that that’s the line of work you’re in. Ironically, the regulations that collection agencies abide by mean that they actually make life a lot easier for people who owe money. The alternative is general unregulated lawlessness, harassing phone calls, intimidation, con-artistry and so on. Collection agencies that abide by the rules are far preferable to simply allowing companies to do whatever they like in collecting the money that they are owed. All the same, collection agencies have a certain reputation no matter how above-board the agency happens to be.
Of course, it’s not just because of the reputation that precedes a collection agency that it can be a difficult line of work. Collection agencies also suffer high rates of chargebacks. It’s not uncommon at all to set up a payment plan with a debtor and have them tell their bank or credit card company that they don’t recognize the charge. Sometimes they do this because they made a payment without studying their finances and making sure that the plan was one they could afford. Other times they may simply not feel like paying.
In any event, collection agencies tend to get hit with a lot of chargebacks, and this is one of the reasons why it can be difficult for people in this line of work to open a merchant account. Banks and other merchant account companies might not even answer your phone calls. When you add the high chargeback rates to the high volume that collection agencies work in, you have a perfect recipe for high risk on the part of anyone who would cover your interests with a merchant account.
Long story short: collection isn’t the easiest industry to work in.
But, hey, somebody’s gotta do it, right?
Defining A Collection Agency Merchant Account
“Collection agency” will generally be defined, by merchant account providers, as a company providing services including account, bill, and debt collection, collateral recovery, repossession, debt portfolio collection, delinquent account collection, fee and contraction tax collection, and, and this is the one that may be surprising, credit reporting. While not all credit reporting companies work in debt collection, there is enough overlap that, to merchant account providers, one is pretty much as good as the other. So, yes, you can be listed as a debt collection agency, and be treated accordingly by payment processing companies, without ever having tried to collect a debt in the line of business at all.
Of course, one of the reasons that credit reporting services tend to be regarded as high risk is because of shady practices in that industry. Credit reporting services often charge monthly fees indefinitely following a one-time credit check. They are legally required to make it possible for users to cancel these payments, but they make the process very difficult, hiding phone numbers and emails and contact forms deep within labyrinthine websites and so on.
Likewise, they can offer a “free” credit check, but “free” as in it signs you up for something and you have one month to figure out how to cancel it before they start taking money from you.
In any event, this is a really easy way to get hit with chargebacks as users will find it far easier to cancel payments through their bank or credit card company rather than try to figure out how to work with a company that has built their whole business plan around being difficult to deal with.
Can A Collection Agency Lower Their Chargeback Risk?
If you work in the collection industry, there are some things that you can do to bring your chargeback rate down a little, but it’s probably not going to render you a low-risk merchant. What qualifies a business as high risk or low risk varies from one payment processor to the next, but one of those qualifiers is the industry that you’re working in. If you sell e-cigarettes or alcohol or firearms, you can bet good money that you’re going to be seen as a high-risk vendor. Speaking of betting, online gambling is generally seen as high-risk by default, as well. And as you may have guessed, collection agencies are pretty much seen by every single payment processor as a high-risk business.
It’s possible to bring your chargeback rate down a bit through certain business practices. If you make sure that the payment plans you set up with debtors are manageable, you’re likely to see fewer chargebacks. If you only work with certain types of client, that can be a help, as well. Some types of debt have a higher rate of repayment than others. If you have no legal recourse to collect the money, if the debtor loses nothing and risks nothing by ignoring your attempts to collect, then you’re more likely to get hit with chargebacks when they make a payment and then read online that they don’t actually have to pay you anything.
Basically, smart, honest business practices will keep your risk down. So will contesting chargebacks with banks and credit card companies. But you’re still going to be regarded a high-risk merchant. It’s worth trying to keep chargebacks down for your own sake because nobody likes being hit with chargebacks. But it’s not going to keep you off the high-risk merchant list. It’s not a bad idea to try and keep your chargebacks to a minimum anyway, but you’re still going to have to look for a high-risk merchant account provider.
One of the best things that you can do for your chargeback rate: Take disputes and complaints seriously.
When you work in the collections industry it’s easy to get kind of weary and cynical. Of course, people are going to contest and complain a lot, because of nobody like having to pay back loans and overdue bills. But you shouldn’t get into the habit of just assuming that every complaint is invalid. If you make a habit of denying valid disputes without paying them much heed, then you’re going to wind up with a lot of people going to their bank to have the issue settled rather than working it out with you.
Obviously, you don’t want to be a pushover, or else how are you going to keep your business in the black?
But you should take the time to listen to investigate disputes for legitimacy before dismissing them.
Finding A Specialist
The upside to being ranked as a high-risk merchant is that you can now shop for a high-risk merchant account provider. This sounds like a curse at first, but it’s more of a blessing. Merchant account providers who do not specialize in high-risk industries do not understand high-risk industries as well as those who specialize in high-risk merchants do. That is to say that an account provider who doesn’t work with collection agencies doesn’t know what collection agencies need in order to run their business effectively.
We’ve all been in this position: You call a company you do business with. Maybe it’s a merchant account provider, but it could be a lender or marketing group or a supplier. Whatever the case may be, you call them up and let them know about a problem that you’re facing, and what you need to be done about it. You explain it clearly, slowly, and they act like you’re speaking a different language. They just don’t get it. They work with people in your industry, but they don’t work in your industry, so they don’t know what you’re talking about. Maybe they think they do, but that just confuses the matter more.
When you work with a specialist, this isn’t as much of a concern. A specialist knows what you need, they understand your industry. The fact that not every high-risk merchant account provider works with collection agencies in the first place actually works to your benefit here, because those that do will be more likely to know how to provide your business with the best possible service.
Is It Hard To Sign Up For A High-Risk Merchant Account?
If your business is above board and you have all of your papers in order, getting approved for a high-risk merchant account is a pretty fast, painless affair. All it really takes is your government-issued ID, a bank latter or voided check, three months of bank statements and payment processing statements, and your SSN or EIN (Employer Identification Number). It’s easier to sign up for a high-risk merchant account than it is to rent a studio apartment in most cities.
What might hold you back and make things more difficult is if you have an especially high rate of chargebacks. For many high-risk merchant account providers, this number is two percent. Two percent may sound like a low number, but two percent comes out to one in fifty. So if one out of fifty transactions are being charged back, that’s a serious problem, and it’s not hard to understand why a high-risk merchant account provider would not want to underwrite that. We covered briefly above what you might be able to do to bring that chargeback rate down a little bit.
In truth, it’s not incredibly common for a company in the debt collection agency industry to have a chargeback rate of two percent or higher. If your rate is that high then chances are that it comes down to one or two things that you’re doing wrong, because it’s very hard to reach a chargeback rate of two percent or higher just in the course of running a normal business.
Many businesses do neglect the importance of disputing chargebacks. The reasoning is that since the banks and credit card companies almost never overturn a chargeback, that it’s never worth fighting it. But the truth is that establishing a precedence makes it easier to fight chargebacks in the future. A bank can ask you why you’re disputing this chargeback, and not a very similar one that took place a month ago. If you contest every chargeback then it becomes easier to have a chargeback overturned when it really counts. Sometimes just a few chargebacks can be the tipping point between just under two percent and just over two percent, so it’s always worth the effort to call the bank or credit card company or whoever it is that’s backing the card, and let them know that you wouldn’t mind having the chargeback reversed.
Note that the bank is never going to give you the follow-up call. They’ll say they’re going to, but they’re not going to.
You need to be proactive when disputing a chargeback. Give it a couple days and then call them back to ask how the dispute is going. Resolution centers at these organizations are notoriously indifferent towards merchants being hit with chargebacks.