Business

Why Are Debt Consolidation Firms High Risk?

Debt consolidation companies provide much needed relief to people who are experiencing huge financial burdens due to their debt. They are able to combine many high interest loans into one with a lower rate. This allows people in debt to reduce their total amount and pay them back faster.

For many Americans, debt is just another part of life. In fact, the total amount of debt owed to the United States reached $ 13.95 trillion last year, according to a study conducted by Nerd Wallet. Last September, credit card balances that carried over from month to month totaled $ 443.96 billion.

Even though it is widespread and common, traditional financial institutions such as banks and credit card processing companies consider debt consolidation a risky business to support. A large majority of merchant account providers will not work with debt consolidation companies. And here are the 3 reasons why.

  • Customers may not be reliable
  • Recurring payments come with chargeback risks
  • Higher financial risk of fraud

Customers may be unreliable

The people who need debt consolidation services are usually those who experience some level of financial stress. Many of them cannot pay their financial obligations nor have bad credit. So, they turn to debt consolidation specialists for a way out of their current predicament.

However, debt consolidation does not mean that debt is gone. These services always require payments from their customers. Consolidation does not change the behavior of the customer, and you may experience the same issues that brought the customer into this situation in the first place. If this happens, it becomes the responsibility of the debt consolidation company to make sure they pay; otherwise, they will have to cover the full amount.

Recurring payments present risk of chargebacks

Most debt consolidation companies will charge their clients a recurring fee for the services rendered. For people who are already struggling to pay their existing bills, these fees often add to the problem, resulting in higher chargeback rates. Other times, customers may forget about recurring charges altogether and may initiate a chargeback when they see suspicious charges on their monthly statement. Many businesses are hit with legitimate scams and friendly fraud tactics, which increase a company’s chargeback rate. This ratio threshold is set by the payment processor and often cannot exceed 2% without the account being closed, but there are chargeback protections you can use on your site.

Higher financial risk of fraud

This is the main reason why banks and credit card processors view debt consolidation companies as high risk. Many times a client looking for your services is in financial difficulty. It causes that person to do shady things in the hope that they can get out of the debt that they have found themselves in. Usually, debt consolidation clients will be unhappy with the way the services are performed and cancel the service without paying. Sometimes caused by unrealistic expectations, the customer is unhappy and will either abandon or reject the transactions that have been made.

A merchant account allows your business to accept credit and debit card transactions; A high risk is designed especially for high risk businesses who cannot obtain a merchant account through normal means. Traditional credit card processors like Stripe, Square, and Braintree generally avoid working with high-risk companies. High risk merchant account providers provide much needed services to debt consolidation companies and the like.

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