DonorPerfect eNewsletter Spring 2009

Most nonprofits accept credit cards. Why? Because donors love the convenience and perks, such as airline mileage, that they get when they pay by credit cards; and because your nonprofit can benefit from the quick collection of funds and the tendency for donations by credit card to be larger (one recent study noted a 20% increase over non-credit card gifts).

But with more and more nonprofits offering donors the ability to make credit card payments, there is the potential for plenty of confusion. Your organization could end up paying more than you need to for processing transactions.

Understanding Merchant Account Fees
Credit card processors label anyone who processes transactions a merchant and hence your processing account is called a Merchant Account. Merchant accounts are financial accounts through which payments are made. Since the financial institutions that issue merchant accounts take some financial risk if the cardholder disputes a transaction, applying for a merchant account typically involves providing information necessary for a credit review.

There are many different elements to the fees you will be charged and many nonprofits find it difficult to directly compare various accounts since there is no simple and consistent way such fees are presented. To help you understand, let’s first separate fees that are one-time from fees that are ongoing.

One Time Fees - There are frequently fees charged for getting established with a merchant account. They may be called Application Fees, Setup Fees, Gateway Setup Fees, etc., but they are all essentially the cost to get started. There may also be one-time costs for software or equipment needed to process transactions. Sometimes the cost of software or equipment will be an ongoing monthly expense if it is provided as a web-hosted solution or if equipment is leased.

Monthly Account Fee - Almost all merchant accounts will have some type of monthly fee. It may be called a statement fee, account fee, reports fee, etc., but regardless, it is simply an ongoing cost of having the account available. Some accounts have multiple monthly charges. These fees typically range from $10-30/month. Other accounts impose a monthly minimum fee as an alternative (or in some cases in addition) to the monthly fees.

Transaction Fees & Discount Rate - Typically, there are two components to the cost of processing each transaction: a per item fee (usually between $0.20 and $0.50) and a fee that is a percentage of the transaction amount, called a Discount Rate. The discount rate can range substantially (usually between 2-4%) based on the type of credit card and the method of processing used. For example, if the discount rate offered is 3%, and you receive a payment of $100 you will be charged $3 as the processing fee. Most of this money goes to the card issuing company such as Visa, MasterCard, etc. (they call this an 'Interchange’ fee).

The challenge with comparing and understanding these fees is that most merchant statements do not present the fees as simply as this. For instance, often the discount rate is broken into components such as a rate that represents the Interchange rate and another line item that represents the additional charge from the processor (the company that facilitates and sends the transactions to the various credit card companies). In this case, you need to add both fees together to find the true cost.

Further complicating matters are the many different rates that can apply to a transaction depending on the type of card used. This is not just if it is Visa, MasterCard, or Discover, but also if it is a Rewards card, Corporate card, Debit card, etc. Other factors affecting this fee include how the transaction is being processed (swiped, keyed in), and even if it passes certain fraud prevention tests such as “Does the address associated with the transaction match the billing address of the credit card?”

According to the credit cards companies, the countless different rates reflect the different levels of associated 'risk’. For instance, they feel there is a greater risk to transactions done without the physical card being swiped. This penalizes phone, mail and Internet transactions. Unfortunately for nonprofits, most of their transactions are not done face-to-face and fall into this category called “card not present” or “mail order telephone order (MOTO)” transactions. MOTO processing rates can also vary substantially based on the type of card and your organization’s processing volume - but it will typically be up to 1% higher than a physically swiped transaction. (Personally, I can’t imagine someone who has stolen a credit card going online to make a fraudulent donation to their favorite nonprofit, but credit card companies don’t see it that way.)

The card types and processing methods will often affect the fees you are charged by dictating if the transaction is treated as qualifying or non-qualifying (for the best rate) transaction. Non-qualifying transactions are charged a higher or additional percentage, and not all processors use the same standards for qualification of transactions.

A PDF version of this article, is available for download here. It includes additional information about how your method of collecting funds affects which payment processing solution you choose, as well as common pitfalls to avoid.