Nonprofit Payment Processing: How It Works & Top Picks


Every nonprofit needs money. It’s not a fun fact, but it is true nonetheless. To get money, you need to have ways to collect it, and in the 21st century, electronic transactions are growing at an exponential rate. To accept funds from a credit card or directly from a bank account, you are going to need a payment processor.

Selecting a payment processor for your nonprofit can be a scary task. What features do you need, how do that actually work, how much do they cost? I will answer all of these questions and more below.

Understanding Payment Processor Terminology

To get started, we need to cover some definitions. Here are some terms that you might want to be familiar with:

Payment Processor

A payment processor is a tool that is specifically handling the transfer of money. A payment processor takes credit card or account and routing number information, places a charge against the provided account, and then deposits money into a merchant account. This is not to be confused with a donation platform, which is a tool many nonprofits use to set up donation forms and fundraising campaigns.

Merchant Account

Merchant accounts are specific types of bank accounts used as a holding place for completed transactions. When a payment or donation is completed, the money doesn’t automatically show up in your nonprofit’s checking account. Instead, it is deposited into a merchant account and then dispersed on a scheduled basis. It is possible to have your own merchant account or to use an aggregator.

Aggregator

An aggregator is a payment processor that processes transactions for multiple customers and has a single, joint merchant account. Aggregator’s used to have a bad reputation because if one of their client’s merchant accounts got frozen for some reason, it would affect all of their customers. This is generally not a concern anymore as security and PCI compliance has improved over the years.

PCI Compliance

PCI DSS or the Payment Card Information Data Security Standard is a set of standards for online financial transactions. There are 4 levels of PCI compliance, with the highest being level 1. The more transactions an organization has over a year, the higher the standards are for them to be compliant. While PCI compliance is a requirement that any organization that accepts online payments has to understand, most payment processors handle all of the transaction data. The biggest fault of many organizations is storing raw credit card information that could be a victim of a cyber attack.

ACH/EFT

ACH (Automatic Clearing House) or EFT (Electronic Funds Transfer) is the process of sending funds from one bank account to another without the use of a credit or debit card. You have probably done this at some point by entering a checking number and routing number on a website to make a payment.

Why Do Nonprofits Need A Payment Processor

Almost every nonprofit should have a payment processor. Why? Because it is the only way to accept payments online. There are multiple different reasons why you might be receiving a payment, but each of them will require a payment processor. Here are a few of the primary reasons a nonprofit might accept a payment.

Donations

This is the first type of transaction that most people think of when they think of nonprofits. In the United States alone, hundreds of billions of dollars are donated to nonprofits every year. In 2017, over $500,000,000 was donated. Also, only 22% of donors said they prefer to donate with cash or a mailed check (https://nonprofitssource.com). This means that if you don’t take electronic payments, you could be leaving 78% of your donors unhappy with their giving method or just losing them altogether.

Physical Store

Some nonprofits sell goods from a building. These are usually thrift stores but can also be organizations involved with the fairtrade movement or supporting the impoverished through selling trinkets produced internationally. If your nonprofit has a store, you will most likely want to accept credit cards as a form of payment. The only way to do so is through the implementation of a payment processor.

Online Store

Similar to a physical store, if your nonprofit sells goods or services online, then you are going to want to accept payment online as well. Online customers have come to expect a smooth online checkout process so it is important to have a payment processor that provides a seamless shopping cart experience and online receipting.

Memberships

Memberships are a great way for nonprofits to have consistent recurring revenue. The largest nonprofit in the United States, the YMCA, generates a sizeable amount of its revenue through gym and program memberships. If your nonprofit is looking at a membership model, you will want to be sure that it can handle recurring payments.

Event Tickets

Let’s be honest, nonprofits love events. From galas to concerts to community impact weeks, events are a way to get communities excited and donors engaged. While many of the events put on by nonprofits are free, some have a ticket price. If this is the case for you, be sure to set up a way to purchase tickets with credit cards, preferably online.

How Payment Processors Work

Now that we’ve made ourselves familiar with the terminology of payment processors and why we would want to use one, it is time to take a deep dive into how they actually work. Here is a step by step process of how someone goes from entering payment information all the way to you seeing the money in your organization’s bank account.

Payment Information Is Entered

The obvious first step in the path to receiving your payout is for a donor or customer to enter payment information. This can be done by swiping or tapping a credit card at a card reader, entering card information online, or even entering bank account information. How you collect the information really depends on the model of your nonprofit. Once that information is collected, it is encrypted.

Payment Information Is Encrypted

As soon as your payment processor receives payment information, it encrypts it to keep it secure. Instead of storing the card or bank information as it is entered, it is transformed using advanced computer algorithms to keep it safe from cyber attacks. Instead of a 16-digit credit card number, a series of letters and numbers will be stored. the only way to decode the number is with a special key that only the payment processor has access to.

Payment Gateway Verifies Information

The payment gateway is the security checkpoint for all electronic transactions. Every processor has its own payment gateway and therefore has different steps it takes when validating transactions. Some gateways are very simple and only check the expiration and CCV from a card while others will verify addresses and even compare the transaction to previous purchases. If the payment gateway flags the transaction as being fraudulent, then the transaction will fail. If it gets the green light, we move on to the next step.

Processor Contacts Account Holder’s Provider

Once the payment gateway has cleared the transaction, your payment processor will notify the bank or credit card company that the transaction information belongs to. The payment processor sends information such as amount, vendor information, and a transaction timestamp. The bank will often run its own verification check as a fraud prevention step along with checking if the account has enough credit in it to cover the transaction. If the bank clears the transaction, it will notify the payment processor and transfer the requested funds.

Money Is Transferred To A Merchant Account

Once the card issuer gives the okay, it will send the funds to the merchant account that your payment processor specifies. As a refresher, a merchant account is not a standard bank account. It is a specific type of account that acts as a holding tank for transactions until the final payout occurs.

Organization Receives Payout

The final step on the transaction’s journey is to end up in your bank account. Most merchant accounts have regular payout rules. They either payout at a certain frequency such as daily or weekly, or they deposit funds into your account once funds hit a certain threshold like $1,000. Either way, you normally won’t see your funds until the next business day at the earliest.

Top Features To Look For As A Nonprofit

A majority of payment processors are built with the for-profit world in mind. Because of this, not all payment processors have the features that a nonprofit might need. Here is a list of the top features to look for in your nonprofit payment processor.

Security And PCI Compliance

This has to be the number one feature to look for when selecting a payment processor. If your processor is lacking in the security department, you risk fraudulent charges, potentially compromised customer/donor payment information, and even having your own bank account compromised. When looking at processor security, it can be a little confusing to understand all of the terminologies. The simplest way to know if a processor is secure is to see if they are PCI compliant. Ideally, they will be PCI level 1 compliant which meets the highest standard put out by credit card providers. Some payment processors also have additional security features including AI that compares transactions to the other transactions they have seen to detect fraudulent changes. An example of this is RADAR by Stripe.

Payment Types

Almost every payment processor starts off with the ability to process credit card transactions. The reality is, however, that sometimes people want to use a different form of payment when interacting with your nonprofit. For instance, Mobile pay solutions such as Apple Pay and Google Pay are more convenient for some users who do not carry their credit cards with them everywhere.

The payment type that most nonprofits will want to be looking for is ACH. ACH transactions have several large advantages for nonprofits that are collecting donations or membership fees. ACH transactions typically have much lower fees than credit card transactions. They also have the advantage of not expiring the way credit cards do. This prevents the need to reach out to donors in an effort to have them update their card information every couple of years.

Integrations

The next feature you are going to want to make sure your payment processor has is a set of good integrations. With solid integrations into the rest of your technology stack, you have the potential to save hundreds of hours of manual data entry and the headache of having mismatching data in multiple places.

For nonprofits, the most common integration to look for is one with your existing or future donation platform and/or donor database. A payment platform is a comprehensive tool that helps you handle donations. There are a range of options to pick from, each with its own pros and cons. One feature that every donation platform has, is the ability to track donations made by individual donors. This greatly helps with year-end receipting and fundraising initiatives.

If your nonprofit sells a product, subscription, or membership, you will want to make sure that your payment processor integrates with any inventory, client management, and online sales solutions. You want your customers to have a seamless payment experience if they are paying online and if your payment processor and product management tools integrate well, you can avoid having to manually update inventory on a regular basis.

Multiple Currencies

Some payment processors can only handle one or two currencies. For many smaller nonprofits, this easily meets their needs. If, however, your nonprofit has customers or donors that might be international, then you will want to make sure that your payment processor can handle their payments as well. While this only applies to a handful of nonprofits, it is still something worth mentioning.

Support

Payment processors are definitely not known for having the best support. Several do not offer any way to contact them outside of a form on their website. It is wise to look at payment processors that offer phone or chat support so that you can have any pressing questions answered quickly. Payment processors are usually straightforward, but when something like a chargeback occurs, you may want to reach out to them.

Payout Schedules

This feature will really only affect your finance team. The payout schedule of your payment processor is the delay between when someone makes a payment and when you receive it as well as the frequency at which you receive money in your bank. Most processors offer next-day payouts where all of the transactions from the previous day are deposited the following morning. It is worth noting that this is not always the case. Sometimes processors will have flexible schedules if that is easier for your team. Other processors will hold the transaction amount for as long as 3 business days before depositing the amount into your account.

Cost And Fees

While all of the features above are important to look at, the cost of a payment processor is probably one of the biggest deciding factors for many nonprofits. There are several types of fees that payment processors charge.

Fee TypeDescription
Flat FeeA flat fee is a standard fee for using a payment processor. This usually comes in the form of a monthly subscription cost. These are fairly rare, but you will still want to check when evaluating costs.
Transaction FeeTransaction fees are applied to any transaction that a processor handles. Fees usually include a dollar amount as well as a percentage of the transaction. Typical card transaction fees range from 1.7% to 3.5% of the initial charge, ACH fees tend to run around 1%.
Incidental FeesThese are the fees that your payment processor charges for specific transaction situations such as a chargeback or card decline.

Understanding the fees for a payment processor can actually make a very large impact on the success of your nonprofit. A fraction of a percent can end up being hundreds of thousands of dollars depending on the amount of money that runs through it. Here is an example of nonprofits of different size looking at payment processor options. Processor A does not charge a flat fee but charges $0.30 + 2.9% of every transaction while Processor B charges $500 monthly but only charges 0.30 + 2.6% per transaction

Monthly Transaction ProfileProcessor A CostProcessor B Cost
$10,000 over 1,000 transactions$590$1,060
$100,000 over 1,000 transactions$2,930$3,130
$1,000,000 over 10,000 transactions$29,030$26,530
$10,000,000 over 1,000,000 transactions$590,000$560,500

As you can see, Processor A ends up being a better deal for smaller nonprofits because it doesn’t charge a monthly fee but for the larger nonprofit, it could be saving almost $30,000 annually by going with Processor B. It is worth sitting down with a spreadsheet and going over the estimated cost of a processor before committing to it.

How To Select The Right Payment Processor For Your Nonprofit

Selecting a payment processor is a big decision. It greatly affects the bottom line of your nonprofit as well as how the rest of your technology systems integrate together. You want to make the right choice the first time because transitioning systems can be difficult and expensive.

Here is a breakdown of consideration priorities depending on the revenue model of your nonprofit.

Donations

Nonprofits that run primarily on donations probably have the hardest time selecting a payment processor. There are a lot of things to keep in mind. You will definitely want a processor that is PCI Level 1 compliant as nonprofit websites are often used to test stolen credit card information. You will also want to make sure that the processor will integrate with any donor management software you are using. Lastly, the cost and transaction types can make a huge impact on your bottom line. If you accept recurring donations, you will definitely want to find a processor that accepts ACH payments as they are cheaper and tend to have a longer lifespan.

Physical Store

If your nonprofit has a physical store, your top priority is processing costs. Most payment processors have high enough security for an organization that is handling in-person transactions. You will also want to see if the processor integrates with any of the other tools you use such as inventory management or checkout software.

Online Store

The priorities for a nonprofit running an online store are effectively the same as those with a physical store. You are going to want to keep your processing costs low so you have a higher return from your sales. You are also going to want to make sure that the processor you select allows you to provide a smooth checkout experience for your users. If the user has to leave your website or if the style of the website changes during the checkout process, many users lose confidence in the security of your website.

Memberships

Memberships are one of the more complex use cases for nonprofits. If this describes your organization, you are going to want to look for a payment processor with recurring transaction capabilities, good integration with your membership tracking tool, and the ability to accept ACH transactions. Having ACH transactions isn’t a must, but it will greatly help keep costs down and prevent members from having to update their card information.

Events

If your nonprofit puts on ticketed events, your number one concern should be finding a payment processor that integrates well with your ticketing service. A weak integration could cause people to purchase a ticket and never receive it, creating a nightmare of tracking down purchases. Depending on the type of event, you may also want to prioritize a processor that is set up to take payments in person for day-of registrations.

Recommended Payment Processors

Now that you know the in’s and out’s of payment processing, here are my top picks for payment processors that nonprofits should use.

Stripe

Stripe is the gold standard for payment processing across all industries. It was the first processor to provide easy online integration and processes over a billion transactions in a year. Because it was the first processor to have an easy integration, it integrates with a very high number of donation platforms and other tools.

It has an AI security system that helps further protect against fraudulent charges by comparing them to other charges it has in its system. Fraudulent charges are something that every nonprofit has to deal with, so having a tool that is preventing them from ever occurring is a huge win.

Lastly, if your primary revenue source is through donations, Stripe offers an amazing processing fee rate of 2.2% + $0.30. This low rate helps your donations go just a little bit further.

You can find out more about using Stripe as a nonprofit here.

iATS

International Automated Transaction Services is a payment processor designed specifically and exclusively for nonprofits. It has been running for over 20 years and has an amazing support team. iATS is a little more complex to set up than most other payment processors because they have you use your own merchant account. iATS offers a very competitive processing fee and integrates with a number of donation platforms.

You can find more about iATS here.

Square

Square is on this list for a specific use case. If your nonprofit has a physical location and accepts payments in person, then Square might be your best choice as a payment processor. Square offers the lowest rates for in-person transactions and integrates with a number of inventory and store management tools.

You can find out more about using Square here.

Related Questions

Can you use Venmo for nonprofits?

While technically Venmo can be used for nonprofits, it probably shouldn’t be. There are a number of features that Venmo doesn’t currently have that most nonprofits would need. If you want to explore this further, you can do so here.

Does Paypal waive credit card fees?

No. Paypal, or any other payment processor for that matter, wave their fees for nonprofits. They do offer a reduced processing fee but any nonprofit should expect to pay at least a 2% transaction fee for any charge run through a credit card.

Are there other good payment processors?

Yes! The list provided here is just a short list of top picks. If your set on a donation platform or set of tools and none of the processors above integrate with them, then you are better off choosing the right donation tool and then selecting the processor from the list of integrations they support.

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