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Why Debt Collectors are Considered High-Risk?

Some companies face more difficulty than others in setting up payment processing services. In some cases, the business owner's personal credit or the newness of the business itself places it in a high-risk category. But for others, the placement comes strictly due to the industry in which they operate. Debt collectors provide one example.

While these companies generally work carefully to perform a service critical to lenders, they generally fall into the high-risk merchant accounts category. Due to the nature and reputation of the business, debt collectors face some difficulty establishing processing services.

Reputation and the Regulatory Environment

Some bad actors undoubtedly exist in the debt collection industry. One need only perform a cursory search online to find horror stories of people receiving harassing calls every day for debts that may or may not exist. While these represent the minority of collection companies, they also lead to the loudest voices of protest and to a reputation that the majority of debt collectors do not deserve.

As a by-product of the reputational concerns, debt collectors face a litany of regulations that affect whether and how they can do business. These shifts depending on politics, timing, and other factors, lending uncertainty to the entire business model collectors use. This uncertainty makes some financial institutions wary of doing business with them and pushes the collection agencies into high-risk merchant accounts when they are able to find service providers.

Irregular Income Concerns

Beyond reputation, the nature of who pays debt collectors creates problems as well. A merchant operating a retail business can typically establish a regular revenue flow, with an expectation of a certain number of customers and a sales average that holds over time.

For debt collectors, though, the entire business consists of collecting on payments from debtors who have had difficulty paying what they owe. It is not unusual for a debtor to make and then cancel payment arrangements, block or revoke payments from their own banks, and dodge additional collection efforts.

This creates difficulties in three ways. First, it makes the revenue stream for the debt collectors irregular, and at times unreliable. Collecting on any individual accounts takes time, and may prove impossible. Doing this for every account makes the business model too unstable for some banks. 

Second, it leads to charge-backs and transactions that may have to be canceled, reversed, re-submitted, and run through multiple paths. The administrative costs add to the collection uncertainty to push banks into requiring high-risk merchant accounts, even if they do approve them.

Finally, collection work provides a high-stress environment. Collection agents often deal with unhappy or angry debtors, creating work conditions that lead to high turnover in the position. Many collection agencies struggle to keep a regular staff and may have trouble maintaining enough employees to remain in business. The uncertainty leads to an assumption that this kind of company is unstable.

Establishing High-Risk Merchant Accounts

The factors that go into the rating debt collectors receive ultimately lead some financial institutions and underwriters to refuse the accounts altogether. For others, they get automatically slotted into high-risk merchant accounts. Even so, some institutions and service providers are willing to take a chance on debt collection agencies.

Working with an organization willing to look at the individual agency beyond the industry stigma allows debt collectors to obtain payment processing services and run their businesses properly.


Kirk Smith

Kirk is currently the AVP Sales/Business Development for GlobalOnePay, a division of Pivotal Payments Inc. Kirk has over 15 years experience in the electronic payments industry. His goal is to identify and establish strategic partnerships with business organizations, Independent Sales Agents and offices in the bankcard space.