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Collection agencies need merchant accounts in order to collect the debts as well as overdue payments that they pursue. However, getting a collection agency merchant account is not easy. This is because many banks consider collection agencies ‘high-risk’ customers.

What is a Collection Agency Merchant Account

A collection agency merchant account provides you the ability to process payments directly from the debtor’s ACH payment processing, credit card, or debit card. It basically streamlines your internal processes, reduces human error, and saves on labor costs.

Why Do Banks Debt Collections as High Risk Merchants

When reviewing the application for debit or credit card acceptance or ACH payments, banks and other financial institutions look at the reputation of your industry. Unfortunately, the debt collection industry doesn’t have the best reputation and one of the primary reasons banks often refuse to open merchant accounts is because collection agencies are often plagued with chargebacks. Chargebacks indicate that something is wrong with the business, probably because of the lack of customer service, transparency, communication, or a combination of them all.

What Other Factors Work Against Collection Agencies

Apart from the chargeback ratio, several other factors work against collection agencies. These include a low credit score, a history of fraud, and more. However, the primary aspect that can determine whether or not you qualify has to do with the type of industry you are in as well as your business type. For instance, a business is considered high-risk if it is in a highly regulated industry. This may include companies in nutraceuticals, firearms, CBD sales, etc. Businesses that are considered a reputational risk are another example. These include debt collectors, vape shops, dating websites, adult entertainment, etc.

What Merchant Account Providers Accept Collection Agencies

Although most merchant account providers and acquiring banks don’t approve a high-risk business, there are several companies that know that a high risk merchant account is sometimes essential to do business. When interviewing a merchant account provider, it is recommended that you ask for references as well as if their experience with processing payments for high-risk businesses.

What’s Needed to Apply for a High Risk Merchant Account

To apply for a collection agency merchant account, you will need to provide the following documents:

  • A pre-printed voided check or bank letter
  • A valid, government-issued ID e.g. a state-issued driver’s license
  • EIN (Employer Identification Number) or SSN (Social Security Number)
  • 3 months of the most recent processing statements
  • 3 months of the most recent bank statements
  • Chargeback ratios must be under 1%

Also, if you operate online, then make sure you have a secure, fully-functioning SSL website.

What Do Underwriters Look for When Evaluating

Collection agency merchants must look like reputable, legal businesses when their applications are being evaluated by underwriters and processors. Underwriters assess risk, so they view the applications thoroughly, particularly those that look suspicious. They want to make sure that merchants are not only operated in the regions and states where they are licensed but they are also in compliance with laws e.g. FDCPA. Following are some additional things underwriters look for when reviewing the application for a merchant account:

  • Solid business model
  • Proper and required state licensure, if applicable
  • Prior processing history, if applicable
  • Personal credit score of the business owner
  • Solid business model
  • Website compliancy per Mastercard/Visa regulations

To increase your chances of approval, it is recommended that you satisfy outstanding debts and bills, have a stakeholder in the business with the best credit history, have a substantial sum of money in the bank before applying for the merchant account. You want to make sure that you handle everything that seems suspicious before the underwriter’s review.

What Are the Standard Merchant Fees for Collection Agencies

Fees for collection agencies vary depending on several factors, such as the merchant’s projected sales volume, type of industry, and/or processing history. Each merchant is different, but the standard fees include:

  • Transaction fee
  • Monthly statement fee
  • Merchant account registration fee
  • Merchant account fee
  • Discount rate
  • Chargeback fee

How Are Debt Collection Merchant’s Classified

All merchant accounts in the U.S. are classified under a 4-digit Merchant Category Code (MCC). MCC codes are used by the payment industry to classify businesses by market segment. Typical MCCs seen within collections credit card processing account include (but not limited to) 6051 for non-financial institutions, 8099 for an agency that collects on medical overdue receivables, or 8931 for professional bookkeeping services. To make sure that there are no limitations to your debt collection merchant account capabilities, it is recommended that you discuss the available options with your merchant account provider.

About The Author

Mark Sands, co-founder of High Risk Merchant Account LLCan authoritative expert in the high risk merchant account space. Mark has decades of experience and an expert in the payment industry. He also enjoys writing on entrepreneurial related topics.