During this week's RA Peer Call, a member asked about the new Visa rule that implements Merchant Category Code (MCC) for debt collection and what it means for debt collectors.
As a result of this question, Sara spent Monday evening researching and speaking to several payment processors to gain additional clarity, and Missy spent Friday morning reading and rereading Visa rules. It is confusing, but here’s what we’ve come to (Missy is insisting we include a disclaimer here that nothing in this newsletter should be considered legal advice, and you should always consult your own counsel).
Background on MCCs
When you accept credit card payments, your payment processor assigns an MCC to your account. Until now, American Express was the only merchant that assigned a specific MCC to debt collection (find the Amex list here). When American Express added MCC 7322 for debt collection as a “restricted industry” the industry responded universally by dropping it as a payment option altogether. Until now, Visa likely assigned a similar but not specific MCC for payments processed via a credit card.
The Current Rule
Visa’s current rules apply to “debt” which includes credit cards, money advanced for goods and services, and repayments that include interest (see page 845). Section 5.8.12 (page 459) of the current rules prohibit an acquirer (bank or processor) from allowing a merchant to use a credit or charge card for repayment of a “debt.”
What is Visa Changing?
Visa announced in October 2022 that they were introducing a new MCC and rules for collection agencies. Visa has defined a collection agency as a merchant that collects payments of overdue receivables under contract or that collects overdue receivables that they have purchased from a third party.
You can find a copy of the Visa Bulletin provided to Acquirers, Issuers, Processors, and Agents here.
Overdue Receivable Definition
Visa has defined an overdue receivable as money owed by one party (debtor) to another (creditor) that is not classified as a debt and is one of the following:
- Classified by the receivable owner as non-collectable
- Written off and/or sold to a third party
- Subject to a court order as the result of a bankruptcy or insolvency
- 120 calendar days past the due date for payment
Based on the above criteria, in addition to third-party debt collection activities, overdue receivables may include any first-party or early-out accounts that are 120 calendar days past the due date for payment.
The Rules and the Debit/Credit Split
Visa’s Bulletin included both “New Collection Agency Rules” and “Overdue Receivables Rules.” At first glance, these rules seem to be in direct conflict with each other, which is causing confusion across the industry.
The Collection Agency Rules provide disclosures that must be read to the consumer, “before the transaction occurs.” However, the Overdue Receivable Rules say that an acquirer (bank or processor), must ensure that a merchant accepting an overdue receivable transaction, “Does not use a credit or charge card.”
Huh? How can Visa allow transactions and require disclosures at the transaction stage, but simultaneously seem to prohibit the use of Visa charge cards to pay an overdue receivable?
Though worded ineloquently, the difference may hinge on whether the payment is made with a Visa debit or Visa credit card.
Taken at face value, the bulletin indicates that effective April 15, 2023, those collecting first or third-party accounts that meet the definition of overdue receivables will be prohibited from accepting Visa credit cards. Debt collectors can accept a Visa debit card if they provide the following disclosures before the transaction occurs:
- Name of the original lender or creditor
- Information to identify the transaction such as:
- Account/reference number from the original lender or creditor
- Description of the debt or receivables
- Date of the repayment contract
- Instructions for the cardholder on how to obtain additional information about the underlying transaction
Additional Clarity Needed
Visa needs to clarify several points before debt collectors can comply with Visa’s new MCC and rules. First, Visa needs to explain the above issue. As worded, it is extremely confusing to everyone who has read it. Additionally, Visa should clarify:
- What does the “Date of the repayment contract” mean?
- Do the “Instructions for the cardholder on how to obtain additional information about the underlying transaction” mean that debt collectors are required to pull debt validation documents long after an account is paid off?
- Do these new rules impact current payment plans which were set up using a Visa credit card?
- Do these rules require collection agencies to submit payments to MCC 7322 and abandon the current MCCs being used?
Impact to Collection Agencies
One school of thought is that since Visa already had rules applying to “debt” this new rule changes very little. Others disagree and contend the update creates a new mandatory prohibition on accepting credit cards.
Some collection agencies might proceed business as usual since there were already rules surrounding debt, and others might decide to stop accepting Visa as a payment option to avoid any issues. Some might even stop accepting credit cards moving forward. After all, it is the most expensive payment option. As always, your team should connect to determine your risk and risk tolerance.
Visa is expected to publish additional information regarding this change before the end of the month, so be sure to watch for information from your payment processor. If those updates do not clarify this bulletin or your payment processor has not reached out to discuss the Bulletin and its impact on your payments, you should reach out directly to them. If Visa aggressively stops credit card payments from going through on April 15, 2023, you’re going to want to know how that impacts your future dated payments.
Research Assistant members can rest assured that we are watching this closely and will alert our members of any additional clarity received from Visa prior to the effective date.
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