TABLE OF CONTENTS
In an ideal world we would all pay for goods with cash and never owe anyone anything, but realistically this is never going to happen, no matter how careful you are with money. In days of old, expensive purchases were only possible if one was very wealthy. Everyone else had enough on their plate trying to scrape together enough money to buy food and put a roof over their head. Today we can buy just about anything we want, from expensive cars to new homes and luxury holidays. We see it, we want it, and then we buy it.
Debt has become an integral part of modern life. It’s almost impossible to fund expensive purchases without going into debt unless you are a member of the mega-rich elite. Most people have to take out a mortgage to buy a home or apply for finance to buy an expensive car. Some people also borrow money to start a new business or expand an existing one. We live in a ‘buy it now’ culture. Sadly not everyone is good at managing their money. Individuals and businesses sometimes get it wrong and end up with debt they can’t service.
When people or businesses get into debt and fall behind with repayments, companies will try a number of strategies to recover the money owed to them. In the first instance, they will write to the customer with a polite reminder to settle the debt. If this doesn’t work, telephone calls may follow. And if the customer can’t or won’t pay the sum owed, the company will call upon the services of a collection agency.
What is a Collection Agency?
Collections agencies collect monies owed to other companies. The creditor might be a bank or a finance company, but equally, it could be a utility company, or indeed any company large or small. If a customer defaults on their payments and threatening letters and phone calls don’t persuade them to pay up, rather than write off the debt, the company will use a collection agency to recover the money on their behalf. They might also sell the debt on to a debt collection agency (it is worth pointing out that this can happen even if the customer does not owe any money or has never missed a payment).
Small companies, in particular, don’t have the time or the resources to spend their days chasing up overdue accounts. Whilst a letter or telephone call might be enough to remind a forgetful client that they haven’t paid their invoice, there will inevitably be some clients who don’t pay up because of cash flow problems. This type of customer is difficult to deal with because they ignore communications, hence why it is standard practice to call in professional collection agencies to take over or sell the debt on.
Clearing Bad Debts
Debt collection agencies have no more power than the original lender, but because debt collection is their primary business model, they have more time and resources to devote to clearing bad debts than a regular company. However, all they can do is contact the customer and negotiate with them to come up with a final settlement offer or payment plan both parties are happy with.
Upon receipt of a letter from a legitimate collection agency, some customers will elect to pay the debt rather than risk the matter escalating to the point where bailiffs show up or they are summoned to court. Often the negotiations take several weeks until both parties are happy with a payment plan.
A letter from a collection agency normally contains details of the money owed plus information on how to make payment. Customers normally have several options for making a payment or settling the debt in full. They can elect to send a cheque to the collection agency or make a payment online using a credit or debit card. For many customers, card payments are simpler because they can be done quickly, whereas writing and posting a cheque requires a stamp and a trip to the local post box. There will also be a delay between writing the cheque and payment being taken from the customer’s bank account, although in many instances this could be viewed as a bonus.
If a debt collection agency can’t make any headway with a debtor, they will sell the debt on to another debt collection company, one that specialises in difficult cases. Eventually, the customer’s options will run out and no amount of negotiation will work. There are also cases where the collection agency can’t locate the debtor or the debtor refuses to respond to letters or telephone calls.
Eventually, the debt collection agency at the end of the chain will have no other option but to write off the debt or take the customer to court to try and recover some of the money owed, and a letter will be sent to that effect. Sensible people will realise the Last Chance Saloon is about to call time at the bar and pay up, but for those who can’t afford to do this, their only option is to wait for a court summons to be served.
Credit card payments are an integral part of modern life. Cash is for many people a thing of the past and with so much business conducted online, it makes sense to offer credit and debit card payments if you want to maximise your business. Not surprisingly, this applies to collection agencies as much as it does to any other business, as the more payment options you can offer the better.
The more payment options a collection agency has available, the easier it is to extract payment from beleaguered debtors. It is in everyone’s best interests if a debtor can make payment as quickly as possible. Credit and debit card payment processing allows a customer to settle up almost immediately, so if a collection agency is only able to accept payments via cheque or cash, their effectiveness will be somewhat limited.
Collections credit card processing is sensible from a collection agency’s perspective. Often customers no longer have access to a chequebook because their bank account has had restrictions placed on it, so a credit card or debit card might be the only way they can make payment. They might also be trying to restructure their debt by way of a low-interest card, so allowing the customer to pay off their debt in this way is helpful to them.
So for the collection agency, offering collections credit card processing is a sound business decision, but finding a merchant services provider that is willing to underwrite such a high-risk sector is a lot more difficult.
Merchant Accounts for Card Processing
Merchant accounts are a special type of account held directly with a bank. Merchant accounts allow a business to accept debit and credit card payments. They verify the customer’s card information, including running checks on their address, and if nothing untoward is flagged up, the payment goes through and the money is deposited in the company’s merchant account. From there, the money can be withdrawn and deposited in a business bank account.
Smaller businesses and start-up entrepreneurs might use a provider such as PayPal to process card payments, but for a collection agency, this is not a viable solution. PayPal is an aggregate provider, which means they operate one large merchant account for millions of individuals and businesses. PayPal does not like working with high-risk businesses and at the first sign of trouble, a company’s merchant account will be frozen.
A collection agency can’t operate if its merchant account is frozen because its collections credit card processing service would not work and if customers can’t pay off their debts quickly and easily, the business will crumble.
The Perils of High-Risk Card Payments
Collection agencies are known in the business as ‘high-risk merchants’. In any business, there will be a certain percentage of chargebacks, but in high-risk businesses, chargebacks are a lot more common. Chargebacks can happen for lots of reasons, including:
- The cardholder disputes the transaction
- The transaction was made fraudulently
- There was an error at the point of transaction, e.g. the card had expired
If a chargeback occurs, the payment will be rejected and withdrawn from the debt collection agency’s account until relevant proof is obtained that the transaction was not fraudulent or otherwise.
Another problem collection agencies have to deal with is that many of their transactions are for large sums of money. And if this type of transaction is subject to a chargeback, it represents a big loss to the company and the bank providing the merchant account services. As a result, most merchant account providers will not do business with high-risk businesses such as collection agencies, so they are limited in their choices of credit card processing merchant account provider.
Chargebacks can occur several months after the payment was made. So, if a collection agent persuades a debtor to pay up and they use a credit card to make the payment, in theory, they could approach their card provider several months later and claim the transaction was fraudulent. The company then has to prove it wasn’t, and unless they have proof, the money will be refunded back to the customer’s account.
High-Risk Merchant Accounts for Debt Collection Agencies
Traditional merchant accounts are not suitable for high-risk businesses, but there are specialist merchant account providers out there who are willing to take on businesses such as debt collection agencies.
Whereas normal merchant account providers don’t like risk, high-risk lenders are more experienced at working in the sector and are less likely to withdraw collections credit card processing services at a later stage. The last thing any collection agency needs is to have their collections credit card processing services withdrawn unexpectedly because the merchant account provider has had a panic attack.
The disadvantage of using a specialist merchant account is that the costs are higher. In return for offering effective collections credit card processing services, high-risk merchant account providers charge more.
Some lenders targeting the high-risk merchant account sector charge extremely high fees for their services. Clearly, this isn’t very ethical, but many debt collection businesses agree to pay astronomical merchant account fees out of sheer desperation because, without a fully-functioning card processing facility, they can’t run a successful business. The point here is that you shouldn’t go with the first lender who offers you a merchant account. By the very nature of your business you will have a limited number of lenders to choose from but always shop around.
What to Look for when Choosing a Merchant Account
Different lenders specialise in different niches within the high-risk sector. Since a lender already working with other debt collection agencies will be familiar with how the business works, it makes sense to choose them because they are more experienced. The better their understanding of your business is, the lower the chances they will withdraw your collections credit card processing facility.
Aside from fees, good customer service is also very important. Chargebacks and refund issues are to be expected when you work in a high-risk industry, so it is imperative that you have access to a knowledgeable and helpful customer service team who are there to help you deal with issues as and when they arise.
Debt collection agencies can’t function without a card processing facility. However, because of the difficulties that arise from operating in a high-risk market, it is important to choose your merchant account provider very carefully. Try and avoid being locked into a long contract with a high-risk merchant account provider, especially if their fee structure is punishing. As the business grows, your risk profile should fall and in time you may be able to apply for a merchant account from a less risk-averse lender that can offer better rates, which will keep costs down and help you plough more money back into the business.