The Ins and Outs of Nonprofit Credit Card Processing
Just like the rest of the world, the systems for taking nonprofit donations are increasingly dependent on credit cards. In this article, we lay out the most important facts about credit card processing that every nonprofit should know.
The Process of Credit Card Processing
Before you commit to a credit card processing system, it is important you understand what credit card processing is and the steps of actually processing a credit card. By definition, credit card processing is the process that allows a merchant to accept credit card information, send the payment information to the credit card network, and finally send the payment authorization back to the bank.
There are many different factors that go into credit card processing. In order to simplify these factors we can frame it in the context of accepting nonprofit donations through credit card processing. Firstly, we have the card holder, aka the donor. We then have the merchant, which in this case is the nonprofit organization. We have the acquiring bank, which is the bank used by the nonprofit organization. We have the credit card processing company, which is the system that the nonprofit chooses to use for processing their credit card donations. We then have the payment network, which is the merchant’s credit card network such as Visa or Mastercard. Finally, we have the issuing bank. This is the donors bank. Knowing all of the components at play will make it easier to understand credit card processing.
We will now outline the steps in processing a credit card donation. First, the nonprofit will take the donor’s credit card information. Next, the credit card processing system will give the donor’s credit card information to the payment network. The payment network will then request authorization from the donor’s bank. The donor’s bank will then validate the payment information and send the information back to the nonprofit. This step exists in order to prevent fraud or overdrawing from the donor’s account. A hold will then be placed in the donor’s bank in the amount of the donation. The nonprofit’s payment processor will then settle the transaction. After this, the funds will be released from the donor’s bank into the nonprofit’s bank. Finally, the various fees are taken from the transaction and the final amount is deposited into the nonprofit’s bank account.
The Benefits of Accepting Donations Through Credit Cards
There are many benefits to accepting credit card donations. First and foremost, taking online and in person credit card donations is extremely convenient. As cash is becoming more obsolete and online donations are becoming more common, it only makes sense to set up credit card processing. By setting up an option to take credit card donations online, your nonprofit can actually increase its donation intake. For example, once you have set up the option to process credit cards you can set up recurring donations such as weekly, monthly, or annual donation options. Having a credit card donation option can also be a major incentive for donors to give large gifts. Many credit cards give points or cash-back incentives for large donations made with credit cards. Additionally, when donors use their credit cards to make large donations many credit cards, including the Charity Charge Business Card, will include these donations in an itemized receipt that will include their donation which will make it easier to write off when tax season rolls around. This is more appealing for donors than giving large quantities of cash without having documentation of their donations.
One of the most important things to take into consideration when it comes to nonprofit credit card processing is that no matter what there will be fees.
There are a variety of different fees that come with credit card processing. Firstly, there is the interchange rate. The interchange rate is not dependent on the credit card processing system, but rather the credit card company/bank of the donor. There are two different charges that come with the interchange fee. It usually takes a percentage of the transaction as well as a flat rate. This all depends on the company, and the type of card the patron uses. The one benefit for nonprofits that use credit card processing for online donations is that the interchange fee is generally lower on “card not present” interactions, such as e-commerce. The assessment fee is also a fee that is associated with the donor’s individual credit card. Assessment fees/ rates are specific to Visa and Mastercard. If you want to learn more about interchange and assessment fees, check out this article by Main Street Merchant Solutions.
The next type of fee is the markup fee. The markup fee is a fee that is dependent on your choice of payment processing system. The markup fee refers to the amount you will pay the actual processing system per each transaction. Generally, the markup fee will be between 2%-3% of the donation amount no matter what processing system you use. This is why it is important to take the markup fee into great consideration when selecting a credit card processing system. The second type of fee that you need to take into consideration when selecting a credit card processing system is the flat fee. The flat fee is a monthly fee that the credit card processing system may or may not require. The flat fee is what the processing system charges for the use of their software. Although monthly fees are off putting, a higher flat fee can be more cost effective for your nonprofit when combined with a lower markup fee. If you’re interested in learning more about different fees associated with credit card processing, check out this US News and World Report Guide.
Do not let these fees prevent you from taking advantage of the benefits of processing credit card donations. First, make sure that you set up your credit card processing system account 100% correctly. While this may seem obvious to say, small mistakes in setting up your account can amount in fees down the line. Additionally, many credit card processing systems are flexible in their fees. If you are set on a certain processing system, then we would recommend you reach out to that organization and attempt to negotiate. Another method for decreasing transaction fees is to reduce the risk of fraud as much as possible. We would recommend looking into an Address Verification Service. An AVS is recognized by most payment networks, and the certification prevents fraud and can bring your transaction fees down by 1% or more.
One suggestion that we would recommend in order to entice donors is to offer to cover the credit card processing fees on donations made to your organization. If you are an organization that has the capital to be able to cover these fees this can prevent donors from being put off by credit card processing fees. If you are a smaller organization that is more reliant on donations we would suggest that you restrict your online donations to debit cards in order to ensure that your nonprofit is receiving one hundred percent of the donation. If you are interested in other digital fundraising tools that could be beneficial for a nonprofit that may not be ready to process credit cards, Charity Charge has created a list of 5 Ways Technology Can Elevate Your Fundraising Strategy.
Overall, credit card processing may not be the correct choice for every nonprofit. But, while there are processing fees that deter both nonprofits and donors, there are also benefits to accepting donations via credit card. Donors can receive cashback and points when they donate their credit card, and the convenience of accepting credit card donations can increase the number of donors that your nonprofit could receive. After outlining the factors, steps, benefits, and fees, your nonprofit should now be able to make the choice of whether credit card processing is the right choice for your nonprofit.
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