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Background Scrrening Wholesaler's Say, "It's Not the Hits, It's the Volume"

June 02, 2025 posted by Steve Brownstein

Wholesaler’s Say “It’s Not the Hits , It’s the Volume”

The wholesaler's problem is if their quantity of requests (both clears and hits), when the total sales of the clears and hits combined don't earn a profit when the clear volume is diminished

 A critical challenge faced by wholesalers in the pre-employment background screening industry when dealing with a "pay for hits, not clears" model.

Here's a deeper dive into the wholesaler's problem:

The Wholesaler's Problem: Volume Dependency and Fixed Costs

The core of the problem lies in the disconnect between how wholesalers incur costs and how they are compensated:

Cost Incurrence for Every Request:

 -Fixed/Semi-Fixed Costs: Wholesalers have overhead regardless of the outcome of a search. This includes salaries for researchers, quality control staff, customer service, IT infrastructure, software licenses, office space, compliance management, and insurance. These costs don't disappear just because a search comes back "clear."

 -Variable Costs for "Clears": Even a "clear" report isn't truly free for the wholesaler to produce. There are costs associated with:

Initial Database Access: Many initial searches hit databases (e.g., criminal record indexes, address verification) which often have per-query fees, even if no "hit" is found.

 -API Usage: If integrations are involved, there might be transaction fees.

 -Processing & Reporting: Each request still goes through a system, consuming server resources, requiring automated checks, and generating a report that needs to be delivered.

 -Compliance Overlay: Ensuring even a "clear" report is compliant with FCRA (Fair Credit Reporting Act) and other regulations requires consistent processes and oversight.

 -Initial Due Diligence: Researchers often perform an initial review, however brief, on every request before determining if it's a "clear" or requires deeper investigation.

Compensation Skewed Towards "Hits":

CRAs explicitly state they pay a premium for "hits" because "hits" require more intensive, manual, skilled, and often time-consuming research (e.g., courthouse visits, direct verification calls, detailed report writing). This is where the wholesaler provides significant added value and risk mitigation.

"Clears" are compensated at a much lower rate, sometimes barely covering the variable costs, or are considered part of a larger volume-based agreement where their main contribution is to provide volume.

The Impact of "Diminished Clear Volume":

 -Erosion of Profitability: When the total volume of requests decreases, and especially when the proportion or absolute number of "clears" drops significantly, the wholesaler's revenue from these lower-paying "clears" shrinks.

 -Underutilization of Fixed Assets: Their fixed costs (staff, systems) remain, but the volume of work to spread these costs across diminishes. It's like a factory designed to produce 1,000 units a day suddenly only producing 100 – the rent and machinery costs are the same, but the revenue per unit is drastically lower.

 -Increased Per-Unit Cost: With fewer "clears" contributing to the revenue, the effective cost per all searches (including the higher-paying "hits") goes up for the wholesaler, even if the payment for a "hit" remains high. The "clears" were helping to absorb some of the overhead.

 -Operational Instability: This can lead to unsustainable business operations, forcing wholesalers to cut staff, reduce quality control, or eventually go out of business, which would ultimately harm the CRAs reliant on their services.

  In essence, while "hits" might represent higher profit margin per item, "clears" represent the volume necessary to make the overall business model sustainable by covering fixed costs and basic operational expenses. Without sufficient "clear" volume, the wholesaler struggles to maintain profitability even if their "hit" rates remain robust.

  This highlights a fundamental tension in many service industries: balancing the desire to pay for "results" (hits) with the reality of fixed operational costs that are incurred for all work processed (clears and hits).