Given that it's so technical, payment processing for nonprofits can seem like a daunting subject.
However, considering that all online fundraising relies on payment processing, it's important for organizations to have a basic understanding of this process and the tools they need to carry it out effectively.
In this article, we'll give you a crash course in nonprofit payment processing, answering questions such as:
- What is payment processing?
- Why is payment processing essential for nonprofits?
- What types of payment processors do nonprofits work with?
- How do organizations conduct payment processing?
- What kinds of payments can nonprofits accept?
- What payment processing security measures should nonprofits have in place?
Don't worry if you're less than tech-savvy or if you know nothing about payment processing; this guide is designed for complete newbies and will outline the basics of payment processing in layman's terms. Now, let's get started!
Payment processing refers to all of the backend steps that occur once a donor initiates a virtual transaction with a nonprofit organization. It encompasses the whole transaction process, from the minute a donor submits their payment information until the donation has hit your nonprofit's bank account.
There are a couple of tools that nonprofits must have available to successfully complete this process:
- The payment gateway. The payment gateway completes the first step of the transaction by verifying the donors' payment information. It ensures that the payment method is valid and runs checks to spot potentially fraudulent transactions.
- The merchant account. The merchant account is a bank account that's used to hold funds as the donation is being verified. It's where the money is housed as it's being transferred from the donor's bank account to your nonprofit's bank account.
In order to receive funds, your organization must have both a payment gateway and a merchant account set up, no matter which payment method the donor is using.
To sum up: Payment processing refers to all of the behind-the-scenes steps that must occur to transfer a donation from the donor to your nonprofit. Organizations must have a payment gateway and a merchant account in order to complete the process.
Without payment processing, your organization wouldn't be able to accept any type of online or mobile donation.
In order to receive contributions from digital channels, whether you're accepting standard donations through your online donation form, taking event registrations, selling merchandise, or conducting another type of transaction, your organization must have a payment processor working behind the scenes.
Nowadays, considering that online giving is only becoming more prevalent and donors are only becoming more and more driven by convenience, organizations must be able to accept online donations to remain competitive in the nonprofit space.
Using a payment processor ensures that your nonprofit can stay up with the times and provide your donors with a convenient and diversified giving experience.
To sum up: Payment processing is necessary for accepting donations and other types of contributions through online and mobile channels, making it an essential tool for nonprofits looking to engage modern donors.
In order to conduct payment processing, nonprofits need to work with a payment processor. Payment processors provide both the payment gateway and the merchant account that nonprofits need to be able to accept online contributions.
There are two main types of payment processors:
ii. Dedicated payment processors
The services of aggregators may be suitable for some nonprofits, but most organizations who need payment processing capabilities should opt to work with a dedicated payment processor. To explain why, let's examine each of these types of processors in more detail.
If you've ever used PayPal, Stripe, or a similar service, your organization is already very familiar with aggregators.
Aggregators are a type of payment processing service that allow nonprofits to conduct virtual transactions without setting up their own merchant accounts. The upsides of working with an aggregator are that it's quick to get set up with their services, and they're usually free to use.
While this might sound great in theory, not having your own merchant account can actually be problematic.
With an aggregator, your nonprofit will have to share a merchant account that the aggregator has already set up with all of the aggregator's other clients. Seeing as these merchant accounts process a much higher volume of money each day, they're much more susceptible to fraud than a unique merchant account would be.
In other words, if one of the aggregator's clients ever became a victim of fraud, it would compromise the security of the whole merchant account. And, since the aggregator would have to address the problems that arise as a result of fraud for hundreds or thousands of clients, your organization likely wouldn't receive very much support in the aftermath.
Not to mention, aggregators often place caps on the amount of money that nonprofits can receive. For example, popular aggregator PayPal only allows nonprofits to transfer $500 a month to their bank accounts. Since all other profits are tied up in the merchant account, those donations are virtually useless until they can be retrieved.
ii. Dedicated payment processors
Like aggregators, dedicated payment processors also enable nonprofits to run virtual transactions.
However, the main difference lies in the fact that with dedicated payment processors, nonprofits must set up their own merchant accounts.
Since these merchant accounts will only be holding your organization's money, they're much less vulnerable to fraud. And, if your merchant account ever did fall victim to fraudulent activity, your organization would receive more attentive support, since the processor would only have to resolve a much smaller-scale issue.
Not to mention, some dedicated payment processors only offer their services to nonprofits. Since they're specialized, these processors can better address the unique needs and concerns that nonprofits face, making the whole payment processing experience more seamless for both the organization and their donors.
Plus, a dedicated payment processor is more likely to support integrations with your online donation software, nonprofit CRM, and other fundraising platforms, so it's easier to collect donor data and create branded donation forms.
To sum up: Nonprofits can work with two types of payment processors: aggregators and dedicated payment processors. While the services of aggregators are more expedient to set up and cheaper to use, working with an aggregator can mean opening yourself up to a higher chance of fraud and receiving less support throughout the virtual transaction process.
Choosing the right type of payment processor is only the first step to deciding how your organization will implement payment processing. In order to put payment processing into practice, you must decide how your organization is going to conduct online transactions in the first place.
The right payment processing solution for your organization will depend on whether you're completely new to online giving or have already established tools and strategies for receiving online donations.
- New to online giving and you don't yet have software for processing online donations, your organization will need to work with a payment processor who enables you to build custom online donation forms and integrate them into your website.
- Experienced in online giving and your organization has already purchased online donation software or other types of fundraising software to facilitate virtual transactions, you'll want to find a payment processor whose services can be integrated with your existing platforms. Many software vendors have partnerships with payment processors, so they'll likely be able to help you select one that supports integrations during the buying process.
If you're already using an established suite of fundraising software, the importance of integration can't be emphasized enough. Integrating your payment processor and fundraising software allows the two platforms to communicate, automating data collection and providing your organization with the most accurate and up-to-date financial reports.
In simpler terms, by integrating, you can save staff time, minimize your room for error, and provide your organization with a more comprehensive set of constituent and fiscal data.
To sum up: Nonprofits can conduct payment processing in one of two ways: either by using a processor to build an online donation form or by integrating a processor with their existing fundraising software.
The type of payments your organization is able to accept depends on what your payment processor can accommodate. However, you should aim to work with a processor who offers plenty of payment options to provide your donors with the most flexible online giving experience.
There are two main types of payment methods you should be able to accept:
- Credit and debit cards. Considering the sheer prevalence of credit and debit cards, your payment processor should definitely be able to accept all major cards, including Visa, Mastercard, Discover, and American Express.
- ACH payments. Commonly known as eChecks, ACH payments allow the donor to initiate a direct debit transaction from their checking account. While less commonplace than debit or credit card transactions, ACH payments generally have lower transaction fees and a higher rate of success (bank accounts, unlike credit cards, never expire!), making them an ideal option for nonprofits.
By being able to process multiple payment methods, your organization can make donating a viable option for more supporters, because you're more likely to accept the methods that your supporters carry.
Just keep in mind that all payment methods (including different types of credit cards) usually have various fees associated with them. Make sure to ask your processor to walk you through all of the costs so that you can be sure you're working with a processor whose services actually fit into your budget.
To sum up: The payment processor you work with should enable your nonprofit to accept all major debit and credit cards, as well as ACH payments. Providing multiple payment options makes the online giving process accessible to more donors.
As smart fundraisers know, one of the keys to building loyal donor relationships and maximizing the money you're able to raise is establishing a culture of trust. This is especially true when something as sensitive as payment processing is involved.
Any time a donor makes an online contribution, they're inputting their confidential information. In order to make donors feel comfortable giving in the first place, your organization has to assure them that you take their security seriously.
The only way to do that is by working with a payment processor who upholds strict security standards. Your payment processor should be PCI-compliant, meaning that they adhere to a set of data security standards set forth by the Payment Card Industry.
Not only is upholding PCI-compliance essential for establishing trust among your donors, but also failure to be compliant could mean that your organization is hit with fees or penalties. In the worst cases, you could even be banned from accepting online donations altogether.
PCI-compliance is a crucial first step; however, when it comes to data security, it's much better to be safe than sorry. If your organization would like a little extra peace of mind, you can look for a processor who offers additional security features, such as:
- Card Verification Value (CVV). Requiring that donors enter the CVV number (the three-digit number on the back of all credit and debit cards) can reduce your risks of becoming subject to fraudulent activity, since donors will have to identify their payment methods in more than one way.
- Address Verification System (AVS). Using a processor with AVS can also lessen the chance of fraud. This feature compares the billing address that the donor has submitted on your donation form with the one they have on file at their bank and alerts you if the two don't match or appear suspicious in any way.
- Minimum donation amount. Some processors require organizations to set a minimum donation amount. Doing so prevents your donation form from becoming a testing ground for fraudulent activity, since many fraudsters will test out stolen credit cards by giving small, random amounts (e.g. $1.34, $2.04).
Now more than ever, donors are asked to make an account before they can contribute to an organization. These accounts are supposed to add another level of security and convenience for the donor, but ultimately, they just provide a false sense of protection.
You might feel safer if your payment and personal information is stored within a password-protected account, but the reality is passwords can easily be guessed or stolen.
While the purpose of a password—verifying the identity of your donors and confirming they have permission to authorize their gifts—is still valid, nonprofits should use passwordless credentials to keep their donors' accounts more protected.
Email verification is a great alternative because it allows donors to confirm their contribution via an email account.
Your organization should strive to make payment processing as secure as possible, but remember to keep it simple as well. Putting up too many barriers can cause donors to abandon the giving process before they click the submit button.
To sum up: Protecting your donors' sensitive information leads to more successful fundraising, because it both establishes trust and ensures that your organization will avoid being hit with crippling penalties for violating security laws.
We hope our crash course has helped you realize that payment processing is nothing to fear! Even by knowing some of the basics, your organization can provide your donors with an improved online giving experience that's sure to result in more donations.
For more about online giving, check out our guide on online donation software.