Last updated December 2022
The underwriting process for a new merchant account can be invasive and exasperating for business owners. This is especially true of those in high risk industries like debt collection.
Immoral or against-regulation activities by some people in the collections industry have given legitimate agencies a bad reputation. Because of these untrustworthy few, merchant service providers and banks view high risk merchant accounts as a liability. In turn, the underwriting choices for third party collection business are limited.
PDCflow understands that debt collection agencies and other high risk businesses need a viable merchant account to accept credit card payments.
That’s why we reached out to a few of our merchant service provider partners that will underwrite a high risk account to learn more about the process.
High Risk Merchant Services Underwriting 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 credit card processing account.
Keep in mind, however, that all providers are different. While the general merchant underwriting process is the same overall, some rules followed and information required may vary from one to the next.
High Risk Merchant Account Additional Requirements
High risk merchant account providers may have some additional requirements for underwriting, especially if your business is a start up in a high risk industry.
For example, you may need to provide documentation that provides proof of:
- A physical office
- Experience within the high risk industry (such as debt collections)
- More than $15,000 in the bank to cover any risk exposure, such as chargebacks.
Newtek Merchant Solutions, a PDCflow partner, does high risk credit card processing but notes that there are a few segments of the debt collection 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 merchant service provider 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. There are, however, some segments that we will not onboard like Payday loans, student loans, and purchased debt.”
MIKE CAMPBELL, CHIEF CREDIT AND RISK OFFICER, NEWTEK
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 businesses the provider in question avoids or views unfavorably.
The Ideal High Risk Merchant Account 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 credit card processing and a low chargeback ratio.
Newtek looks for merchants with a chargeback ratio of under 1 percent, while other merchant service providers can be slightly more lenient. Some may be willing to accept a ratio under 1.5 percent, as long as the high risk merchant’s history doesn’t show evidence of increasing ratios over time.
How to Calculate a Chargeback Ratio
1. From your merchant statement, find the number of chargebacks incurred.
2. Find the total number of card transactions.
3. Divide the number of chargebacks by the total number of transactions.
Some merchant service providers that are willing to underwrite high risk merchant accounts may require 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 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 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 merchant 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 litigation, 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. Waiting to see if we will find the red flags is not a good way to enter into the relationship.”
MIKE CAMPBELL, CHIEF CREDIT AND RISK OFFICER, NEWTEK
Other red flags include:
- A consistently high or increasing chargeback ratio
- Frequently changing or attempting to change processors
- Collectors of payday loans
- Collectors of 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 in Merchant Underwriting for High Risk Payment Processing
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.
It is not unusual for underwriters to request an interview with merchants or ask for more documents. Underwriters are just trying to understand the relationship they are about to form.
Because the underwriting process can sometimes be confusing, it is invaluable to have a payment processor, or another partner, who can guide you. 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.
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