Collection agencies need to have a way to process payments, and having a merchant account makes that possible.
A merchant account is basically a financial holding tank. It is the account that money goes into whenever a payment is processed.
From there, the merchant account provider removes any necessary fees that they charge to process transactions. Once the fees are removed, the money is then sent to the business’s bank account.
There are ways around having a merchant account for some businesses, such as using a payment aggregator instead. But that method and others are not appropriate for high-risk businesses, like collection agencies.
Any business that plans to accept and process financial transactions will need a merchant account to do it.
Payment processing is quite complicated, and there is a lot of work that is done behind the scenes to ensure that everything happens seamlessly; from the money leaving the customer’s account to when it gets deposited into the merchant’s bank account.
Some do, and some don’t.
You will probably find that most of them do, and they are more appropriately called merchant service providers because they offer both the merchant account and payment processing services.
If you currently have a merchant account and you are looking for a different company to process your payments, this type of arrangement is possible.
Collection agencies may use one of two different methods to process payments. The options are:
Collection agencies can process a few different payment methods. But, depending on the merchant service provider you choose, not all of them may be available for you to offer to your clients.
Debit cards are connected to individual bank accounts, and when they are used, the money leaves the account immediately.
Most people have debit cards and use them on a regular basis instead of cash. This payment method is often acceptable with any merchant account provider.
But debit cards do have their downside as well.
Cardholder payment data is frequently changing due to lost or stolen cards, data breaches, and expirations. Still, this is a fairly reliable payment method that typically carries lower transaction fees.
Not all merchant account providers will allow collection agencies to accept credit cards as a form of payment. This is for a few different reasons.
Credit card users will only be incurring more debt to pay off their current debt, which many companies believe is unethical.
Many people in debt understand how easy it is to dispute a charge and that they have six months to do so. They may request chargebacks on payments made to collection agencies as a way to delay payments or try to get rid of them completely.
Chargebacks are a real risk for debt collection agencies, and too many of them can cause your merchant account to be frozen or closed.
When a client makes a payment with an electronic check or by ACH, money is debited from their bank account. This method carries much less risk than credit card payments.
It’s also much more stable because, for the most part, a person’s banking details do not change. That means there’s no need to worry about updating any data, and recurring payments can be set up easily.
Both electronic checks and ACH are very similar, and if you’re the one taking payments, you won’t really see much of a difference. Neither will your clients.
The difference is seen in the backend of payment processing, and it involves the way debits take place.
ACH payments cost the least to process, and they are processed through the ACH network, which is governed by NACHA. According to the rules set by NACHA, chargebacks need to be kept under 0.5% and returns need to be kept at less than 15%. This can be challenging.
Echecks use bank-to-bank clearing technology to process payments. They do not use the ACH network, which gives them greater flexibility for chargebacks and returned transactions.
There are some debt collectors who will start their clients off with electronic check payments until they have more of a payment history. In time, they transition them to ACH.
There is a lot to think about before you make your choice for a merchant services provider. It will be helpful to do some research on all of the following.
A chargeback can occur when a person’s credit card is stolen and used and the fraudulent charge is reported. But it can also occur when a person decides to dispute a transaction for any reason.
The debt collection industry is considered to be high-risk because their clients are people who already have poor or bad credit. People with a lot of debt and lower cash reserves are much more likely to dispute valid charges.
Excessive chargebacks can quickly get a merchant account frozen or even closed completely.
But many providers offer chargeback protection and there are also ways to prevent them as well. This is definitely something you should look for because it will help you keep your merchant account in good standing.
When you take a payment, it won’t immediately be deposited into your business bank account. There is a process that must be gone through, which we mentioned above.
You will want to know how long it will take before payments hit your business bank account. Some merchant account providers are able to payout in 24 hours, but that timeframe may be longer for high-risk businesses like collection agencies.
It’s not unreasonable to look for payouts to occur within 48-72 hours.
As a high-risk merchant, you will most likely be subject to rolling reserves, regardless of which company you choose as your merchant account provider.
This is considered to be standard procedure for some businesses, including debt collection companies.
Having a rolling reserve means that a certain percentage of your payouts will be kept back for a period of time; usually six months or so. Once six months have passed, those payments will be released as new ones go through the rolling reserves process.
Some merchant account providers will require high-risk merchants to have ongoing rolling reserves. For others, as long as they continue to not exceed the chargeback limit, that might change.
After some time has passed with a positive payment processing history, rolling reserves might be eliminated completely, or the percentage may be decreased.
In general, merchant services providers require their customers to agree to certain fees. These can include:
Transaction fees typically range from 3%-5% for high-risk businesses. Each merchant account provider will have a pricing structure for fees, which could include interchange-plus, tiered pricing, or flat-rate pricing.
Also, each payment method will have an amount assigned as a transaction fee, with e-checks being the lowest.
Let’s get down to the nitty-gritty of how to choose an excellent merchant account provider.
There are some things you should look out for, and some you should avoid.
It might be a challenge to find a merchant account provider that won’t lock you into a long-term contract, but they’re out there.
A company that requires you to commit to a 3 to 5-year contract should throw up some red flags. If you decide to change your mind and go with a different provider, you could be charged thousands of dollars in additional fees.
In a way, having a contract makes sense because your business is high-risk, after all. But there are providers that offer short-term or even month-to-month contracts.
At the very least, make sure you know everything there is to know about what happens if you cancel the company’s services. The last thing you need is to have your account frozen or get hit with high early termination fees.
You’ll want to learn as much as you can about any payment processor or merchant account provider you are considering.
The Better Business Bureau will be a great resource for you. The same is true for Facebook, Google, and Yelp.
There are online reviews written about various payment processors that will also give you some valuable information you can use to make your decision as well.
Customer service is incredibly important.
No matter which merchant services provider you choose, there are going to be issues from time to time. When they occur, you want to know that you can get them resolved right away.
The best collection agency merchant account providers should provide you with excellent customer and tech support. You may even have a dedicated agent whose job is to assist you with everything you need.
At the very least, you should be able to get in touch with customer service at any time, day or night, if at all possible.
As you get closer to choosing your merchant account provider, you’ll need to get ready to submit your application.
It can be helpful to understand the process that you’ll go through.
You’ll need to provide some documentation to any merchant account provider you want to work with. Here’s a list of what you’ll have to provide:
It’s an underwriter’s job to assess risk.
They’re looking for proof that you operate a legitimate, reputable business that includes abiding by all laws and regulations. They also want to know that your business is a reasonable credit risk.
The underwriting process doesn’t have to be difficult, and as long as you don’t have any outstanding credit issues with your business or your own personal credit, getting approved should be fairly simple.
The length of time it will take to get your merchant account approved will depend on a few different factors:
Most high-risk merchant account providers work with multiple acquiring banks. If they are knowledgeable, they should be able to pinpoint the ones that are most likely to work with your business.
Once the company has received all of your documentation, the onboarding process should only be about a week or so. There will be some time involved with integration, but sometimes that can be completed in just a few minutes.