Nonprofit payment processing: A guide for new buyers

For funds to move from your donors’ bank account to your nonprofit’s, you need to work with a payment processor—a company that will manage the transactions between donors and your organization.

From this explanation alone, you may think that the decision to pick the right payment processor is an easy one. After all, what else do you need from a payment processor other than the ability to facilitate payments?

As it so happens, there are many details about these payment systems that will affect the donor experience, the safety of donor data, and the ways in which you can increase incoming donations. For example, while there are many general aggregate payment processors on the market, there are also payment providers that create solutions exclusively designed for nonprofits.

Unfortunately, many organizations lack the knowledge of nonprofit payment processing to understand how these backend systems can impact their fundraising. This leads to poor payment processing decisions that can stunt your potential to gain revenue and cultivate supporters without you even knowing it.

This guide is designed to help you navigate the market of nonprofit payment processing and choose the right payment solution. Let’s get started!

What is nonprofit payment processing?

Nonprofit payment processing refers to the system that facilitates online payments between donors and nonprofit organizations. From making donations to purchasing gifts and merchandise, this software ensures that payments are safely transferred into your financial account.

That’s the bare-bones, basic definition of nonprofit payment processing. But to truly understand what payment processing entails and the different steps involved in the process, there are a few more terms that your team will need to familiarize yourselves with.

Nonprofit payment processing terms you need to know

There are many hidden steps to managing an online transaction, from collecting the donors’ financial information to depositing it into your nonprofit’s merchant account. Many of these hidden steps require a knowledge of the specific vocabulary related to payment processing to fully understand.

Here are some basic payment processing terms you should know to gain some insight into its operation:

• Payment gateway: When a transaction is made, the donor’s card information goes through the payment processor’s payment gateway. This is a fraud prevention method, and it protects donors’ information throughout the entire process until it reaches the merchant account.
• Payment authorization: An anti-fraud measure, payment authorization is a process by which the payment processor verifies that the donor’s financial account and their payment amount are valid.
• Merchant account: This is the account where the nonprofit accepts and holds all donations from debit or credit cards. This is set up between a nonprofit and a merchant-acquiring bank and usually has a small fee taken for each transaction deposited into the account.
• Third-party processor: This is a payment processor that helps nonprofits accept online funds without having to create their own merchant account. This processor doesn’t partner with a bank and instead gives the nonprofit organization access to the processor’s merchant account.
• Aggregator: This is a larger company that processes transactions for many other companies or nonprofit organizations through the same merchant account. The funds go to the aggregator’s account with other organizations and companies. From there, the merchant is paid out, sometimes only once a month. A well-known example of this type of processor is PayPal.
• ACH (automated clearing house): ACH (also known as direct debit) is responsible for the electronic fund transfers between banks and merchant accounts. These usually take 72 hours to be completed.
• Tokenization and encryption: This is when card information is hidden as it goes through the payment process.
• PCI compliance: The Payment Card Industry (PCI) Data Security Standard (DSS) are guidelines created by credit card companies to help ensure all organizations meet security standards for safe payments.
• Fraud protection tools: A quality payment processor offers additional fraud protection tools to protect your organization and donors’ information. These tools may be able to be customized to your nonprofit, ensuring you only invest in what you need.
• Hold period: A hold period is the length of time your payment processor can retain your funds before disbursing them.

Think of nonprofit payment processing as a continuation of your donor-facing fundraising efforts. After you have collected donations using a donation tool such as your online donation form, the transaction information then goes through a series of back-end processes.

With these fundamental terms in hand, we can now take a closer, step-by-step look at a question that too few organizations know the answer to: what does the nonprofit payment process actually look like?

What does the nonprofit payment process look like?

Because the nonprofit payment process occurs in the backend of your operations, the fundamentals are fairly easy to understand once they’ve been broken down.

For example, here’s a brief overview of the back-end processes involved in completing an online credit or debit donation:

1. The donor initiates payment using a credit or debit card to enter a gift through your online donation page.
2. The donor’s payment then travels through your payment processor’s payment gateway, which initiates a round of verification and authorization processes.
3. The payment processor contacts the card association that issued the card used by your donor. The processor relays important identifying information about the transaction, such as payment amount and account details, to the card company.
4. The card association then passes this information along to the bank responsible for managing the donor’s finances.
5. The bank uses this data to assess the donor’s account. Based on the proposed transaction, the donor’s payment details and the health of their bank account, they will determine if the donor is able to accommodate the transaction.
6. The bank will then choose to approve or deny the donation. Once the decision has been made, the bank will contact the credit card company which will then contact you with the bank’s approval or denial.
7. If the transaction is denied, your processor will flag the transaction and notify you of any suspected fraud. If the transaction is approved, the payment will be transferred from the donor’s account to your merchant account. Your merchant account acts as a final go-between, transferring the payment into your bank account.

Do nonprofits pay credit card processing fees?

The simple answer is yes. Your organization will almost certainly need to pay an additional processing fee for credit card transactions. However, your choice of payment processor plays a large role in how much you will pay, the method in which you pay and how much of your donations you can keep while still benefiting from a robust processing service.

A typical payment processor will use an interchange plus system. This means that it will charge you for each transaction, often taking between two and three percent of every individual payment. On top of that, these services will also charge a monthly fee.

By contrast, some payment processing services opt for a streamlined flat fee system. Your organization would simply pay a single fee for the entire month—no additional costs or unpleasant surprises.

Types of donation methods that require payment processing

Not all donors are willing or able to give in the same way. When choosing a nonprofit payment processing solution, opt for a service that facilitates the following essential donation methods:

ACH payments

ACH payments are donations that are directly debited from a donor’s bank account. An easy way to think about these direct debit payments is to look at them as electronic checks.

Direct debit payment processing is less expensive than credit card processing. Instead of taking a fixed rate plus a percentage of each transaction (like credit card processing does), ACH only takes a flat fee. This is because a direct ACH payment bypasses the lengthier process needed to verify and facilitate a credit card transaction, cutting costs like assessment fees out of the equation.

Donors can use ACH payment processing to donate via their personal checking or savings accounts. Once the money is in your nonprofit account, you don’t have to worry about any chargeback fees or bounced checks.

Card payments

Credit and debit card payments are very common. Nearly everyone has a credit card, and most people use their cards to shop or donate online.

While credit cards are convenient for donors, the fees associated with credit cards can be relatively high depending on the credit card type. Because of this, many nonprofits offer both credit card and ACH payment options for ease and convenience. Donors can choose the option they’re most comfortable with.

Important security features for nonprofit payment processing

Whether your donors begin their journeys with a text-to-give message or are inspired to donate because of a social media post, most end up in the same place: your online donation form.

This form is an essential part of your fundraising operations, and ensuring it’s as simple, easy and secure as possible can help to ensure that donors actually finish submitting their gifts.

For example, a simple design will make your form easier and faster for donors to fill out. Meanwhile, a secure donation form helps create an environment in which donors can donate without worrying about the safety of their data.

On top of that, a strong, secure payment processing system can directly benefit your organization’s public image. After all, being on the receiving end of payments fraud can lead to monetary losses and widespread reputational damage.

To instill donor trust, shield incoming revenue and protect your organization from the data leaks, be proactive and take steps to fortify your online payment process. Here are some common payment and fraud schemes to watch for:

Common online credit card scams

Credit card scams are one of the most likely attacks that your payment processor will face. Here are two critical scams your nonprofit should be on the lookout for:

• ACH fraud: Scammers have taken note of nonprofits increasingly using ACH payments for fundraising. Fraudsters can steal an individual's bank account routing number through phishing or database hacking.
• Donation form fraud: This type of online theft specifically targets nonprofits. Many scammers use online donation forms to test out stolen credit card numbers. Similar to ACH fraud, donation form fraud involves requesting refunds for false donations made by the scammer. Just because thieves might target your nonprofit for payment fraud does not mean there's nothing you can do to protect your organization and donors.

Security measures to protect against fraud

Here are a few key strategies to help prevent thieves from successfully targeting your organization:

• Improve password security across your nonprofit organization
• Protect your business banking account from fraud with a payment gateway
• Implement BIN/CVV2 anti-fraud tools into your online donation form
• Train your team to recognize phishing emails
• Verify cardholders’ identity when processing credit and debit card transactions
• Work with a PCI-compliant payment processor

Nonprofits are uniquely vulnerable to online fraud, and your payment processor should be aware of the threats your organization faces.

How to choose a nonprofit payment processor

The vast majority payment processor users tend to be for-profit companies. Processors frame policy and terms of service based on the requirements of these for-profits and often apply the same standards to nonprofits.

Here are some ways in which these policies may not serve the interests of your nonprofit:

• Hidden charges and fees: It can be difficult to keep track of additional charges and fees on top of the base processing rate. Even if the base rate seems low, the effective rate can be expensive and difficult to justify to your board. Ask about implementation, training or additional fees that could be incurred before investing in a solution to have a complete view of the expense before investing in your solution.
• Indifferent customer service: Some payment processors may discourage their customer service reps from spending more time on clients than necessary, leading to hasty service. In some cases, customer service is outsourced, and quality control is often lacking. In demos, ask providers about their policies regarding customer service to be sure you’ll get the attention your organization deserves.
• Difficult sign-up process: Payment processors that primarily work with for-profit companies generally have a more rigorous registration process for nonprofits, which can be a drain on your precious time and resources. To bypass this hurdle, seek out a processor that specifically works with nonprofits, has experience with nonprofit clients, or even includes a nonprofit-specific version of its sign-up procedure.
• Unempathetic policies: Large payment processors can often change their policies with little or no regard for their nonprofit and small business clients, especially if they make up a small portion of their client base. Perform some preliminary research in advance, checking up on the companies’ policy history and previous client experiences, to ensure that you partner with an organization that is sensitive to your organization’s needs.
• Lack of access to expert advice: Many nonprofits are stretched for resources and lack the business expertise needed to make optimal payment processing decisions. In such cases, it is natural for you to turn to your processor for advice. However, many processing companies only provide access to customer service reps, many of whom lack in-depth knowledge of payment processing. Once again, preliminary research is your best bet to avoid this challenge. By locating a nonprofit-specific processor or a processor that has had experience with nonprofit organizations, you can confidently expect the company to provide advice, clarification, and guidance more tailored to your needs.
• Lack of data portability: If you decide to stop using your payment processor, you need to be able to transfer saved information regarding your donors' credit card information to your new processor. However, some larger aggregators do not allow such data portability. As you’re searching for a payment processing system to suit your needs, investigate data portability functions and keep an eye out for a processor that can integrate with your other tools and export important donor data into these systems.
• Long hold periods. Aggregators typically have hold periods of 30-45 days, and in some cases, even 90 days. Large processors have more power to arbitrarily set longer hold periods to serve their own cash flow and financial interests, often to the detriment of nonprofits, who need quick access to their funds. On the other hand, a dedicated payment processor does not use the same algorithm as large aggregators to determine hold periods. These smaller, more personalized systems operate for and with your specific organization to determine more reasonable hold periods, protecting your organization from fraud without keeping you locked out of your own funds.

Most payment processing systems, like those used by for-profit organizations, say they can work for your nonprofit’s fundraising efforts. However, these general payment processors are probably not meeting your nonprofit’s unique needs, whether that’s recording the right donor data, handling recurring gifts, or sharing information with your nonprofit’s CRM.

Choosing the right payment processor can set your nonprofit organization up for long-term success. With a dedicated payment processor designed specifically for nonprofits, you’ll be better prepared to increase fundraising capacity and manage your donor data.