The underwriting process for a merchant account can be invasive and exasperating for business owners. This is especially true of those in high risk industries like collections. Immoral or against-regulation activities by some people in the collections industry have given legitimate agents a bad reputation. Because of these untrustworthy few, processors and banks view high risk merchant accounts as a liability. In turn, the underwriting choices a third party collection business may pursue have become limited.

PDCflow understands that collection agencies need a viable merchant account, just like any other business. That’s why we reached out to a few of the Merchant Service Providers we work with, including Newtek Merchant Solutions and High Risk Holdings, to learn more about the process. If you’re a high risk merchant, and you’re unsure of what to expect, here is some helpful information to prepare you to apply for a merchant account. Keep in mind, however, that all providers are different. While the general process is the same overall, some rules followed and information required may vary from one to the next.

Special Considerations For High Risk Merchant Accounts

Although Newtek and High Risk Holdings are happy to work with high risk merchants, there are some special considerations involved with this type of underwriting. High Risk Holdings will work to underwrite collection agency startups whenever possible, but there are requirements the merchant must fulfill. Startups must have:

  • A physical office
  • Experience within the collections space
  • More than $15,000 in the bank to cover any risk exposure, such as chargebacks

Newtek does quite a bit of high risk underwriting, but notes that there are a few segments of the collections space that they won’t work with. Payday lenders, student loans, and those with purchased debt will be denied merchant accounts. These businesses are too risky, even for a high risk underwriter such as Newtek.

“Newtek Merchant Solutions has been able to demonstrate a solid portfolio of high risk accounts and have a solid relationship with our sponsor bank,” said Mike Campbell, Chief Credit and Risk Officer at Newtek. “There are, however, some segments that we will not onboard like Payday loans, student loans, and purchased debt.”

As mentioned above, different Merchant Service Providers have different standards. Although Newtek avoids merchants who work with purchased debt, other underwriters may choose to do so at their own discretion. When going through the process, it is always best to ask up front which types of merchant accounts the provider in question avoids or views unfavorably.

The Ideal High Risk Merchant Application

There is no standard for an ideal candidate in underwriting. There are, however, a few components that will speed up the process. A good applicant will already have a strong history of processing and a low chargeback ratio.

Newtek looks for merchants with a ratio of under 1 percent, while High Risk Holdings is slightly more lenient. They are willing to accept a ratio under 1.5 percent, as long as the merchant’s history doesn’t show evidence of increasing ratios over time. Some Merchant Service Providers that are willing to underwrite high risk merchant accounts have a minimum monthly volume processing threshold of at least $50,000. Others do not, and are willing to board smaller merchants, as long as they meet the other underwriting requirements.

What if you have no history of processing because you’re a startup? There are a select group of Merchant Service Providers, such as High Risk Holdings, who provide this service. They are willing to underwrite startups, as long as the merchant provides:

  • A live URL
  • Any necessary licenses
  • Working capital in the bank
  • Proof of a history in the industry (this can be demonstrated through a resume stating qualifications)

Items That Cause Concern Or Raise Red Flags

The most obvious red flag during underwriting is a poor reputation in past dealings. If there is an indication of poor practices evidenced by the Better Business Bureau or the Consumer Financial Protection Bureau, underwriters may deny an application or require further explanation. Another alarming sign for underwriters is if the merchant has a history of litigations, negative press, or any other items that suggest poor or unfavorable business practices. However, past issues may not always be a deal breaker. If you have something in your history that could be construed in a negative manner, it’s best to disclose it during the application process.

“If there are some potential issues, let’s address them and be upfront about it and we can discuss,” said Campbell. “Waiting to see if we will find the red flags is not a good way to enter into the relationship.”

Other red flags include:

  • A consistently high or increasing chargeback ratio
  • Frequently changing or attempting to change processors
  • Collectors of payday loans
  • Collectors with purchased debt
  • Other merchant accounts on a bank statement
  • Financial instability, or main source of revenue coming from another company
  • Sharing an account with another merchant

What else to expect

Once all the required documents have been turned in, you may have more work ahead of you. The underwriters usually gain insight into your business from these items alone, but sometimes they need clarification. Keep in mind, it is not unusual for underwriters to request an interview with merchants or ask for more documents. This isn’t always a bad sign. Underwriters are just trying to understand the relationship they are about to form.

Because the underwriting process is confusing, it is invaluable to have a payment processor, or other partner, who can guide you through the process. PDCflow has established relationships with many different types of Merchant Service Providers. We can offer advice on which provider will best fit a merchant’s business based on their individual circumstances. We work with our clients to provide the best solution at the best rates, based on individual merchant needs.

For more information, see PDCflow’s Credit Card Processing Solutions or call us at 1-877-732-4814 ext. 1.


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