Landing a collection agency merchant account can be tricky, but we’ve helped open many before (and are ready to get you one too). Read on for an in-depth look at the following:
Table of Contents
- State of the U.S. Debt Collection Industry
- Relevant Laws & Codes
- Struggles Facing a Debt Collection Agency
- Commonly Asked Questions
- Tips for Getting Your Merchant Account Approved
- Additional Debt Collection Industry Information
Although crucial for the overall health of the credit and lending industries, U.S. debt collection agencies often find it difficult to obtain merchant services. This is because traditional financial institutions and payment processors consider debt collection agencies to be “high risk” due to the industry’s above average chargeback ratio, reputation for shady business practices, as well as an increasingly stringent set of government regulations put in place to control them.
We provide tailored payment processing solutions to businesses of all types and sizes. 95.7% of high risk merchant account applications that come to us get approved, and we even specialize in helping out debt collection agencies. We’ll work together with you through the whole process, regardless of whether you’re a seasoned veteran or just getting started.
If this all sounds promising to you, then keep reading for more about the state of the debt collection industry, the most common challenges and questions, and a load of great tips, resources, and stats to help your agency succeed.
1. State of the U.S. Debt Collection Industry
The debt collection industry is currently in a state of gradual decline due to tighter government regulations and falling debt recovery rates.
- Historically, the debt collection industry has grown rapidly, seeing 2010 revenues more than 6.5 times higher than 1972 revenues (adjusted for inflation).
- As of 2018, however, revenue is projected to decline through 2023.
- Total debt recovered has increased in recent years, but the collection rate has decreased.
- Agencies collected $40 billion in delinquent debt in 2010 and $55.2 billion in 2013; however, the average industry debt recovery rate has decreased from 30% to 20% over the past few decades.
Companies and jobs
- There are close to 9,000 players in the debt collection industry, and agencies tend to be small, employing only 14-16 workers each on average.
- ACA International, a leading industry trade association, reported that 44% of its members (831 companies) had fewer than nine employees, 85% of its members (1,624 companies) had 49 or fewer employees, and 93% of its members (1,784 companies) had 99 or fewer employees.
- The Bureau of Labor Statistics Occupational Outlook Handbook reported in 2016 that there were approximately 305,700 jobs for “bill and account collectors.”
- The industry is expected to lose about 9,100 jobs from 2016 to 2026, a decline of about 3%. This is at least partly due to an increased use of automation in the industry.
Still, there is a general sense of economic optimism with respect to U.S. household debt, as Americans continue borrowing and banks and financial institutions gain confidence in lending. Furthermore, the need for collection agencies (and therefore collection agency merchant services) will undoubtedly remain, because debt collection is a critical service for maintaining the balance between consumer debt and available credit.
Total Debt in the U.S.
The total U.S. debt is higher than ever — as of the first quarter of 2017, U.S. household debt totaled $12.73 trillion, which is higher than the peak of $12.68 trillion during the 2008 credit bubble. Some stabilization at this level is expected between 2016 to 2026.
Also, the type of debt Americans take on is changing. For example, student loan debt made up 11% of total household debt in 2017, a 5% increase from the third quarter of 2008. Mortgage debt is decreasing, and auto loan debt is on the rise.
Outstanding and delinquent debt
ACA International reported $12.07 trillion in outstanding consumer debt as of 3Q 2015. Furthermore, the Federal Reserve Bank of New York reported $652 billion of delinquent household debt as of December 2015, with about two-thirds of that being 90 days late or more.
Additionally, “nearly 14% of consumers in the U.S. have at least one account in third-party collection.”
In 2014, the Center for Responsible Lending reported that “more than one in seven adults is being pursued by debt collectors in the U.S., for amounts averaging about $1,500.” And ss of March 2018, outstanding debt totals has eclipsed one trillion USD in three major categories:
- $14.9 trillion in U.S. mortgage debt
- $1.13 trillion in U.S. auto loan debt
- $1.03 trillion in U.S. credit card debt
In addition, 42.9 million people had overdue medical debt in the U.S. (with a $1,766 average balance owed)
As of Q3 2015, the “total debt balance delinquent by 90 days or more” could be broken into four major categories:
- Student loans: 11.6%
- Credit cards: ~8%
- Auto loans: 3.4%
- Mortgages: 2.3%
And by May 2018, there was $1.48 trillion in U.S. student loan debt, and the student loan delinquency rate was 11.2%. Note that although these numbers are dire, around 90-95% of debt is paid on time, and in accordance with contractual obligations.
Complaints (Positive Takeaways)
- The industry contacts over one billion consumers annually, but the percentage of consumer complaints is relatively low — around 0.005% in 2017.
- In 2017, the rate of timely responses to complaints by collection agencies improved from 91% in 2016 to 94%, and 84% of all cases were closed with explanation, up from 78% in 2016.
Notable Public & Private Companies
The debt collection industry is highly fragmented, with an estimated 8,941 companies providing collection services. Most of these companies are private and very small, averaging just 14-16 employees each.
Here are three of the major publicly traded collection agencies, along with their annual revenues from their most recent 10-K filings:
Another notable public agency, SquareTwo Financial Corp, filed for Chapter 11 bankruptcy in March 2017.
Here’s a list of notable private companies, courtesy of Debt.org:
- ABC Financial Services
- ERC (Enhanced Recovery Company)
- Firstsource Advantage
- IC System
- National Asset Recovery
- Nationwide Credit & Collection
- Regional Finance
- Rocket Receivables
- Sherman Financial Group
- TSI (Transworld Systems)
On the government side, the Internal Revenue Service has its own list of select private debt collectors. (Incidentally, one of these collectors was recently accused of violating the Fair Debt Collection Practices Act and the IRS Code.)
Also, the U.S. Department of the Treasury’s Bureau of the Fiscal Service offers debt collection services to the federal government and to the states.
2. Relevant Laws & Codes
The Fair Debt Collection Practices Act
Collection agencies in the U.S. are subject to the Fair Debt Collection Practices Act (FDCPA), a 1977 consumer protection amendment to the Consumer Credit Protection Act. The FDCPA was designed to protect consumers from abusive, unfair, or deceptive business practices. Note that the FDCPA generally only applies to third-party collectors (as opposed to internal collectors or credit originators), and that it governs personal, family, and household debt, but not business debt.
The FDCPA is overseen jointly by the Consumer Financial Protection Bureau and the Federal Trade Commission. Although the CFPB is the primary governing body responsible for administration and rulemaking related to the FDCPA, both the CFPB and the FTC can enforce the FDCPA.
Collection agencies are also subject to state regulations that impose additional mandates beyond the FDCPA, such as requiring agencies to obtain licensing and bonding. State regulations vary widely. Read more about state debt collection laws here.
Consequences of Not Following Them
Government supervision of the debt collection industry is persistent and unforgiving, and the cost to companies that violate the FDCPA and/or state legislation is significant. Case in point: In 2015, the CFPB ordered Encore Capital Group and Portfolio Recovery Associates to pay up to $42 million and $19 million respectively, plus penalties, for violating consumers’ rights. Of course, in addition to fines, violations can also cost companies their merchant accounts.
Industry Codes (SIC & NAICS)
Most collection agencies fall under the Standard Industrial Classification (SIC) code 7322 (Adjustment and Collection Agencies). Other codes sometimes used are:
- 8748 (Business Consulting Services, Not Elsewhere Classified)
- 7323 (Credit Reporting Services)
- 7389 (Business Services, Not Elsewhere Classified)
They also use the North American Industry Classification System (NAICS) code 561440 (Collection Agencies). Other codes sometimes used are:
- 561450 (Credit Bureaus)
- 541618 (Other Management Consulting Services)
3. Struggles Facing a Debt Collection Agency
Debt collection agencies come up against some imposing obstacles in the course of coaxing cash out of debtors. Here are four common struggles you might face, and how to overcome them in order to secure the best merchant services possible.
Problem #1: Inaccurate and/or Incomplete Consumer Information
A staggering 90% of consumers “are concerned about debt collectors using bad or incomplete information to target the wrong people, seek payment on debts already paid, or file lawsuits without the necessary evidence to prove their cases.”
Those consumers are right to be worried — tellingly, the FTC estimated that as little as 6% of portfolios purchased by debt buyers include the documentation necessary for ensuring fair and accurate debt collection. Once portfolios leave the hands of originators, the trail starts getting colder and colder as accounts age, and make their way from one collector to the next.
- Don’t purchase portfolios without the proper accompanying documentation.
- Don’t attempt to collect on debts unless you can verify them. You want to be sure you’re not contacting the wrong people, sending notices to the wrong addresses, or attempting to collect from the deceased.
- Use debt collection software to help identify recoverable accounts, keep costs down, and maximize debt recovery.
Problem #2: Increased State and Federal Regulatory Crackdowns
State and federal supervision of the debt collection industry has tightened dramatically over the past couple decades, and this trend is expected to continue.
States began targeting debt buyers in the late 2000s. From 2000 to 2012, there were 29 changes in state regulations, 22 of which likely made it harder to collect on delinquent debt. And if the onslaught of state legislation isn’t enough of a headache, the feds are cracking down now more than ever, too.
The CFPB rolled out debt collection industry supervision for the first time ever in January 2013, focusing on companies with “annual receipts of more than $10 million.” Six months later, the U.S. Treasury Department’s Office of the Comptroller of Currency introduced a set of debt collection best practices for banks.
For what it’s worth, here’s how things have been going for noncompliant agencies over the past few years: in 2014, the FTC permanently banned 47 companies and individuals from working in debt collection; as well as 30 in 2015, 44 in 2016, and 13 in 2017.
- Work with a quality assurance and compliance agency to monitor your internal processes and practices for problems.
- Review the CFPB’s Policy & Compliance page to learn how to be compliant. While you’re at it, you might as well take some time to review the CFPB’s consumer FAQs page, too.
- Provide timely responses to any complaints you receive.
- Be transparent and quick to communicate with your collection agency merchant account provider regarding any negative public perception or government scrutiny.
Problem #3: Chargebacks
Chargebacks can be a crippling problem for any merchant. They’re a clear indication that something fishy is up, so payment processors are likely to close or freeze accounts if they see a chargeback ratio exceeding 1%.
The debt collection industry chargeback ratio is historically high, unfortunately, due to a variety of factors ranging from erroneous debt collection attempts to disputes from debtors who simply don’t want to repay. While some chargebacks you see might be legitimate, others might be fraud or friendly fraud.
Of course, payment processors and their underwriters don’t care about what kind of chargebacks you get, or even why your chargeback ratio is high — all they care about is the ratio itself. Once you enter that danger zone above 1%, you risk having your collection agency merchant account closed or frozen.
- Make an effort to provide excellent customer service. Consider offering 24/7 live support.
- Maintain a clear and complete paper trail for all debts you collect.
- Be ready and willing to offer refunds (full or partial) if necessary — this is far better than incurring a chargeback on your account.
- Work with an agency like Motile to secure a payment gateway that provides dispute alerts and helps with chargeback prevention and avoidance.
Problem #4: Application Denials
Given high chargeback ratios as discussed above, plus the abusive practices of unscrupulous and predatory debt collectors, banks and other traditional payment processors are cautious or simply unwilling to provide collection agency merchant services. You’re likely to see an application denied for no reason other than the fact that you’re a high risk merchant.
- You can try working with an aggregator like PayPal or Square, but they might lock you down if they notice suspicious activity. Like traditional banks, aggregators typically don’t like taking on high risk merchants.
- Identify a company that specializes in high risk merchants and collection agency merchant accounts. Find a payment processing solution that can work for your business.
4. Common Questions Debt Collection Agencies Ask
Question #1: Why did my account get closed?
There are several reasons why your collection agency merchant account might have been closed.
One possible situation is that your payment processor’s underwriter changed its policies regarding high risk merchants, and your company fell into a category they’ve determined to be too risky. Many banks and traditional financial institutions simply aren’t willing to underwrite debt collectors in the first place because of the risk, and oftentimes, institutions that were previously willing to underwrite decide to change their policies.
Another possibility is that your chargeback ratio is above 1%, which is a big red flag to most payment processors.
Question #2: How can I get lower rates and a higher processing volume?
High risk merchants like debt collection agencies should expect to face higher than normal rates and caps on processing volume. This is because payment processors are looking to mitigate risk on their end, and the smartest way to do this is to put stricter limitations in place for high risk merchants.
There aren’t any quick and dirty tricks here. To decrease rates and increase the processing volume of your merchant account, you’ll just have to put in the time and effort to show yourself worthy. Payment processors are looking for signs of stability and profitability, so focus on establishing the following financial track record:
- 3-6 months of successful processing
- Steadily growing volume
- Stable account balance with predictable transactions
Question #3: What payment processing options are available?
There are a variety of credit card processing methods, debit card options, and Automated Clearing House (ACH) payment strategies for debt collection agencies. Echeck and check 21 solutions are also available for many businesses.
Question #4: How do I get a collection agency merchant account?
You should start by finding a high risk credit card processor willing to work with you. Then, it’s about being organized, transparent, and flexible. You might not get the perfect rates and volumes immediately, but that’s simply part of working in a high risk industry.
5. Tips For Getting Your Collection Agency Merchant Account Approved
Tip #1: Don’t Be Dishonest
Make it your primary business goal to abide by all federal and state regulations — not just because you have to, but because people deserve to be treated fairly and professionally.
If the debt collection industry wants to continue thriving and providing a necessary service in this era of increasing government regulation and heavier public scrutiny, then it’s going to come down to individual agencies making the conscious decision to be honest.
As a debt collection agency, you should avoid the following prohibited behavior at all costs:
- Harassment — threats, obscenity and profanity, repeated and annoying phone use
- False statements — inaccurate debt amounts, impersonation, claims about legal action
- Unfair practices — illegal collection or attempted collection of interest on top of debt, early deposits of post-dated checks, illegal seizure or attempted seizure of property
Here are more specific examples of things to avoid at all costs, courtesy of the Center for Responsible Lending’s aforementioned 2014 report:
- Relying on defective, inaccurate, and/or insufficient proof of debt
- Collecting on time-barred debts (beyond the statute of limitations)
- Collecting on zombie debt
- Providing improper or “sewer” service
- Setting default judgment traps
Tip #2: Establish a Stable Track Record
As mentioned above, in order to land a collection agency merchant account, it’s crucial to be able to show payment processors that you’re good for your money. You’ll want to line up 3-6 months of successful payment processing with a stable balance, predictable transactions, and growing volume. It’s also important to keep your chargeback ratio under 1%.
Tip #3: Join a Trade Association
A trade association membership can give debt collection agencies valuable resources and guidance on best practices and compliance. It can also provide a boost in terms of consumer trust and public opinion. Here are a couple major associations to consider:
ACA International is a leading trade association for the credit and collection industry that “establishes ethical standards, produces a wide variety of products, services and publications, and articulates the value of the credit and collection industry to businesses, policymakers and consumers.” It was founded in 1939 and represents 230,000+ employees. There are numerous benefits to joining ACA International that can help your business succeed.
Formerly DBA International, RMA International is a nonprofit trade association that was founded in 1997. It represents 550+ companies “that support the purchase, sale, and collection of performing and nonperforming receivables on the secondary market.” Check out the benefits you get from becoming an RMA International member.
Tip #4: Don’t Get Too Attached to One Payment Processor
High risk merchants like debt collection agencies should be prepared for some flip-flopping when it comes to payment processors. Even the best relationship can take a turn for the worse without notice.
So, whatever service provider you end up using, it’s wise to have a backup plan in case the winds of fortune change. Save some time by working with a Motile agent who can set you up with the best merchant accounts for debt collection agencies.
6. Additional Debt Collection Industry Resources and Information
Full text of the FDCPA published by the Federal Trade Commission.
Policies, guidance, compliance information, and related resources about U.S. federal consumer financial laws.
June 2018 report on the industry from IBISWorld, a leading market research and intelligence firm founded in 1971.
ACA International whitepaper that analyzes a database of recent CFPB debt collection complaints, and suggests that the number of consumer complaints is relatively low compared to past figures.
April 2014 report by the Center for Responsible Lending with a comprehensive overview of debt collection and debt buying, predatory industry practices, state and federal legislation, U.S. household impact, and policy recommendations. A few years old, but still extremely informative and helpful.
Trade association resource page with up-to-date information, alerts, articles, how-to guides, FAQs, training, and a whole lot more for agencies both large and small.
Trade association resource page with online learning and webinars for receivables compliance certification and continued professional education.
Insight into the debt laws in every U.S. state, curated by the Nolo Network – a massive online library of consumer-friendly legal information.