Strategic Profits Inc

Payment Processing 101: What your Nonprofit needs to Know

Feb 07, 2017

Patricia O’Connor
Partner Account Manager, iATS Payments

Let’s face it: we live in a digital world -- and so does your nonprofit!

Whether you’re seeking donations via an online form, accepting merchandise payments on a card reader at your fundraising event, or requesting gifts through your social media pages, digital transactions are likely already a large part of how your nonprofit does business.

You’re probably already processing credit card payments on a daily basis, but you may have never considered how exactly that money gets from Point A (your donor’s pocket) to Point B (your nonprofit’s bank account).

The answer isn’t as complicated as it might seem. It all comes down to a simple concept we call payment processing.

In this article, we’ll break down the mystery of payment processing.

From the basic definition of payment processing to best practices for keeping your transactions totally secure, we’ll take you from beginner to master of using payment processing to your advantage.

Here’s what we’ll cover:

  1. What is payment processing and why does it matter to nonprofits?
  2. How does payment processing work?
  3. What types of payment processors are there?
  4. Are credit cards the only acceptable payment type?
  5. What payment processing services can nonprofits use?
  6. What security factors should be considered?
Now, let’s dive in!

Payment processing definition

1. What is payment processing and why does it matter to nonprofits?

Simply put, payment processing is a general term that refers to all the steps that must successfully take place in order to move a digital donation from donor to nonprofit.

Think of it this way: payment processing encompasses all the moving pieces that must fall into place between the time your donor clicks “confirm donation” and when the dollars appear in your organization’s bank account.

You might encounter payment processing through something as standard as a donation form on your nonprofit’s website or as potentially large-scale as a crowdfunding campaign.

No matter what you’re planning, remember: without a payment processing solution in place, your nonprofit will only be able to accept cash or check payments. Your organization might miss out on a significant amount of potential fundraising dollars!

Now that you’re well-versed in the “why’s” of payment processing, let’s take a deeper look into how these behind-the-scenes steps actually occur.

The bottom line: Payment processing refers to the series of events that make digital transactions possible for your nonprofit. It’s an important process that allows your organization to collect online donations in many different forms.

How payment processing works

2. How does payment processing work?

In order to move your donor’s money from one place to the next, you’ll need to work with a payment processor.

There are a few different types of processors out there, but all you need to know right now is this:

Your payment processor is the provider who equips you with important tools to verify your donor’s information and securely move the money from one account to the next.

There are four basic steps that will push your payment from start to finish:

  1. Initial Payment
  2. Payment Gateway Verification
  3. Merchant Account Transfer
  4. Final Deposit
Don’t worry -- we’ll be going over each of these in more detail!

i. Initial Payment

Payment processing can’t begin without a payment, of course. A monetary donation can be given through any digital platform, be that a computer, tablet, or smartphone.

Remember: if a donor wants to give on any online platform, your organization will be employing some form of payment processing to make the transaction go through.

The donor inputs his credit or debit card information onto an online form, letting the payment processor know that a transaction has begun.

ii. Payment Gateway Verification

After the donor has submitted his gift, the information he has provided moves to the payment gateway.

What’s a payment gateway? A fraud prevention tool provided by the processor.

The payment gateway checks the information to protect against potential fraud. The provider uses this tool to verify the card number and security code as well as other information such as the donor’s name and address.

If the provider notices something awry at this stage, the gateway will communicate any issues to your website so that the donor can try again. If there aren’t any issues, the payment moves ahead to the next phase.

iii. Merchant Account Transfer

After the donor’s information is verified, the processor transfers the funds to the merchant account.

The merchant account holds the donation while it is transferred between your donor’s account and your own.

Depending on the type of payment processor you’re using, you might be working with a merchant account through your own bank or through a larger shared account. We’ll touch back on this topic later.

iv. Final Deposit

Now that your donation has cleared both of the provider’s checkpoints, the money can finally make its way through to its final destination: your nonprofit’s account.

Depending on your processor, the money may appear almost immediately in your organization’s account; otherwise, you may need to request the funds from your processor.

At this point, you should have a good understanding of how payment processing takes place. For an even more detailed look into how your nonprofit can utilize this process, check out Double the Donation’s Beginner’s Guide to Payment Processing.

The bottom line: Payment processing works by moving the funds through a series of checkpoints put in place by your processor. Money moves from the payment gateway to the merchant account before finally reaching your nonprofit’s bank account.

Types of payment processors

3. What types of payment processors are there?

You know that payment processing is essential to your nonprofit, and you know how it works. But how do you go about implementing payment processing for your own organization?

When selecting a payment processing solution for yourself, it’s important to consider the two main types of processors you can choose from:

  1. Aggregators
  2. Dedicated payment processors
Either form of processor will get the job done, but there are specific differences you’ll want to pay attention to.

i. Aggregators

Aggregators require the nonprofits to use a shared merchant account. This means that many businesses use the same merchant account at once, and the aggregator is responsible for holding all their payments. (In many cases, the aggregator processes hundreds of thousands of transactions a day!)

These services are typically free for the user and allow you to start accepting funds immediately since the account has already been set up.

While aggregators are popular, their wide usage does make clients more susceptible to fraud. Additionally, with such a massive network of users, you won’t get the personalized services of a smaller processor.

ii. Dedicated Payment Processors

Dedicated payment processors are the alternative to aggregators. These individualized processors allow organizations to set up unique merchant accounts to handle only their transactions. This means you’ll get:

  • Personalized support
  • Specialized tools
  • Easy fundraising software integrations
You’re also much more likely to find a dedicated payment processor that specializes in nonprofit usage, which means you’ll be working with someone who understands your business and already knows how to help you.

The bottom line: Both aggregators and dedicated payment processors are viable options, so it’s up to your organization to choose which type of processor works best for you. While aggregators are easy to get started with, dedicated processors offer specific advantages to nonprofits and are ultimately a more advisable choice.

Payment types

4. Are credit cards the only acceptable payment type?

From credit to debit and everything in between, your nonprofit is likely dealing with a multitude of different payment types on a regular basis already. Knowing how your payment processor works with each payment method is key to understanding your options and limitations.

Generally speaking, any processor should be able to accept all major credit cards (Visa, American Express, Mastercard, Discover).

However, it’s equally important to look for a processor that works with ACH debit payments as well.

ACH (or automated clearing house) payments are deposits made directly from a bank account.

Think of it as a virtual check. Donors simply enter their bank account number and routing number, and the processor handles the rest.

Because there are fewer steps involved in processing an ACH payment, the donation takes less time to appear in your bank account, meaning you’ll get your money faster than with a credit card transaction.

Moreover, the ACH option allows for the setup of automatic recurring gifts -- an obvious benefit to your organization!

Being able to process whatever payment your donor would like to give means maximizing your donation potential, so look for a processor who prioritizes payment flexibility.

The bottom line: The most effective processors will be able to work with both credit card and debit ACH payments. Your donors want to feel comfortable donating, so find a processor who can handle both cards and e-checks.

Payment processing services

5. What payment processing services can nonprofits use?

Different processors will offer different services for your nonprofit. While there’s no right or wrong way to most effectively use payment processing tools, there are some specific features to keep an eye out for as you begin working with a payment processor.

i. Online Donation Forms

Perhaps the simplest way to get started with digital transactions, online donation forms are easy to incorporate into your organization’s existing online presence. Simply embedding the form into your website will allow you to quickly collect and process donations on any digital platform.

Standalone donation forms are a solid option for nonprofits that are just starting out with online donations. Not to mention how easy they are to promote and share!

ii. Fundraising Software Integrations

Payment processors can also offer options for integrating their services into the software you already use, such as mobile giving platforms or online donation forms.

In particular, integration with your organization’s CRM software can allow you to manage data more efficiently and accurately. As payments are processed, your CRM will automatically collect and manage all data. Everything is taken care of, all in one place!

The bottom line: While standalone donation forms are a good way to get started with online giving, integration across multiple programs will make it easier for your nonprofit to collect payments and data long-term. Your nonprofit will need a processor that can work with whatever services you’re already using and will use in the future.

Security factors to consider

6. What security factors should be considered?

Although payment processing has become next-to-necessary to maximize giving potential, it’s still important to be aware of the security concerns that go along with any online transaction.

Cybercrime has become a big business in recent years. As physical fraud becomes harder to pull off, criminals are moving to online methods of identity theft. Your provider should be aware of cybersecurity issues and be prepared to combat them by offering you a myriad of security solutions.

Here are a few security features to be on the lookout for:

  1. PCI Compliance. The most crucial security feature to be aware of is PCI compliance, which means that the payment processor is abiding by a set of data security standards set forth by the Payment Card Industry (PCI). Nonprofits whose payment processors are not secure will see fewer donors and more fraud, so it is essential that your organization uses a trusted, secure provider.
  2. Encryption and tokenization hide card data as it passes through payment systems, making it harder for hackers to access the information. These steps are mandated by PCI standards and are critical for keeping donor information safe as it passes through the payment cycle.
  3. Fraud protection initiatives put in place by your processor can further prevent security compromises. These services might include address verification, card verification code requirement, and IP blocking.
The bottom line: Security is arguably the most vital aspect of successful transactions. Make sure that your processor abides by PCI standards and ask what strategies they have in place to protect you and your donors.

In Short

Payment processing allows your nonprofit to perform digital transactions with multiple types of payments across virtually all platforms. Choosing a payment processor may seem daunting, but understanding your nonprofit’s needs in relation to a provider’s capabilities will help you make the right choice for your organization.

If now is the right time for your nonprofit to move forward with selecting a payment processor, we recommend taking a look at iATS, a dedicated payment processor with a multitude of services and tools that might be right for your organization.

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