NP Times

By L. Nicholas Deane

Getting a good deal on processing

Click here to see the Directory of Credit Card Processors

It is the rare nonprofit that doesn't accept credit cards these days. Whether you're selling goods in person, soliciting donations over the telephone, or raising funds on the Internet, you have to accept them because that's what donors want to use.

But, do you know what you are paying for them?

"Most nonprofits don't pay attention to their credit card processors, and they have no idea what they are paying for the services," said Lou Milani, senior director of business affairs for Consumers Union, in Yonkers, N.Y. A few financial executives at nonprofits who were interviewed for this story couldn't name their credit card processors, much less tell you if they were getting a good deal from them. Like any other service that you buy, you should monitor your credit card processor. You might be able to get a better deal, better service or better reports elsewhere.

According to Jim Daly, editor-in-chief of Credit Card Management, a trade magazine for the credit card industry, the overall average rate of nonprofits and for-profits that switch their credit card processors is approximately 12 percent a year. But according to Ted Fabis, product sales director for Cardservice International, most nonprofits never change their credit card processor. In fact, he said, they never even question the prices or service -- they just keep on with whatever processor they started with and they continue to pay any price increases that come along.

You are paying up to 3 percent of your credit card receipts to the processor, so it's not an insignificant expense, according to Milani. "When you have millions of dollars in credit card receipts, it really adds up," he said. Milani suggested evaluating your processor at least every three years, and comparing prices with other vendors.

Mary Dees, president of Creditranz.com, a credit card consulting firm in Dallas, agreed that nonprofits don't pay enough attention to their card processor. When asked how often a nonprofit should take a look at its processor, she suggested "Quarterly. At least." She also stressed that not only do you want to make sure you're getting the best deal, you want to make sure you're getting the best service.

How payments work

The process of a credit card payment is relatively simple. The donor or consumer makes a charge with the nonprofit, which then goes to the card processor for authorization of the charge. The processor then goes to the bank that issued the card for the authorization the consumer has sufficient credit and then reports back to the nonprofit. This is done in a matter of seconds: It is the "waiting for authorization" process you go through as a credit card is scanned through a machine.

After the nonprofit closes out the transactions for a given period -- usually every day -- the processor then requests payment from the bank that issued the card. The processor then takes that payment and deposits it in the nonprofit's bank. This should take a day or two. The bank that issued the card then bills the consumer.

In setting up to accept credit cards, the first step is to get a merchant account, which is simply a bank account designated to receive credit card receipts. Most nonprofits simply use their regular bank for this, although some card processors will require a separate account.

The second step is to obtain equipment necessary to handle transactions. This step is simple but important. You don't want to buy something that you are not going to need, such as a wireless card processor, or extra equipment that you won't use.

Most equipment leases are for 48 months, after which you buy the equipment outright for a minimal charge, usually one month's rental or $1. But, according to Card Service's Fabis, it is up to the nonprofit to monitor this. Often, even after the lease term has run, the processor will continue charging the standard rental rate until you tell them you want to buy the equipment outright. They do this, according to Fabis, simply because they can under the terms of the lease.

If you plan to accept credit card payments online, there's another step: You have to sign up with a payment gateway. Payment gateways allow for real-time credit card authorization for online transactions. Your payment gateway must be compatible with both your software and your financial institution so that transactions flow properly. You also have to buy and install the software for Internet transactions, which can cost up to $1,500.

Types of processors

Basically, there are three different places you can turn to be able to handle credit card payments:

1. Your bank. This is where most nonprofits turn. Banks are constantly marketing credit card services, and they will usually try to sell you on their services when you open an account. But most banks do not actually handle the processing of credit card transactions, and instead will outsource your account to a third party processor.
2. Independent sales organization (ISO). An ISO is essentially a broker of credit card services. It will set you up to handle credit card transactions and, like a bank, will hand the processing of your transactions off to a credit card processor.

3. Third party processor. Third party processors are in the business of processing credit card transactions. Whether you go to one of these directly, or are sent to one by your bank or ISO, it is these processors who you will be dealing with for your credit card transactions.

Whichever you choose, according to Dees, you should look for a processor who has demonstrated expertise in working specifically with nonprofits of your size. Not only do you want someone with expertise with organizations like yours, but some financial institutions restrict with whom they will do business. For instance, Chase Manhattan provides third party processing and merchant accounts, but only to nonprofits that have been in business for three years. If you've been around for less than that, they will send you to CardService International for processing.
The next step is the application process. Waiting for an application to be approved can take anywhere from two days to two weeks. Your chances of being approved depend on how you raise funds and your credit rating. This is important because banks that issue credit cards don't want someone to fraudulently charge big amounts, take the money and skip. Existing nonprofits are the easiest to be approved, while new organizations that rely heavily on mail order or the Internet, where fraud is more prevalent, are a little more difficult.
Your costs
The cost of your processing will vary based on the perceived risk your nonprofit presents. The biggest financial threat the merchants usually pose to credit card companies is chargebacks.

Chargebacks are items that a customer disputes and ends up not paying. These items -- which can be the result of a mistake or a misunderstanding as well as fraud -- have already been credited to the nonprofit's account, so the nonprofit has to pay them back to the credit card processors.

Debra Rossi, executive vice president of Wells Fargo in San Francisco, likes nonprofits as customers for credit card business because there's not a lot of fraud and very little in the way of chargebacks. "Electronics stores are an expensive business. There's a lot of fraud. But how many people are going to make a fraudulent donation to charity on a credit card?"

As an example, she cited a project where Wells Fargo created a Web site for the American Red Cross to solicit contributions for families of September 11 victims. In the first four months, the site collected $1 million with no chargebacks. A for-profit would never have such a good experience, she said.

Nonetheless, processors will still look at the type of credit card transaction that your nonprofit performs.

According to Credit Card Management's Daly, "card present" transactions, that is, transactions where you actually swipe the card and obtain a signature, are considered to be much safer than "card absent transactions" made over the telephone, by mail or the Internet. It is these less safe card absent transactions that are more common for most nonprofits.

In terms of actual costs, you can expect to pay up to $300 in start-up expenses when you choose a new processor. This includes the application, setup and equipment, and rental lease deposits. "The price quoted is often very different than the price charged," said Creditranz.com's Dees. "One reason for this is there are 30 different categories of interchange all with different rates."

The interchange rate is the rate charged by MasterCard or VISA, on which the processor will then add a charge for its services. The nonprofit should make sure that the rate quoted is based on the type of transaction that it will most commonly engage in, for instance, card present, Internet, or etc.

Processing fees can range from approximately 1.7 percent to 3 percent of volume.

Another processing fee charged by the merchant bank is the per transaction fee. The per transaction fee is generally 20 cents for card present transactions and 30 cents for card absent transactions.

Some companies will also charge you a monthly minimum fee, ranging from $20 to $35 a month. This fee kicks in when it is greater than the total amount paid in discount rate fees. For example, if your discount rate is 2.5 percent and your monthly minimum is $25, if you charge less than $1,000 in a month, you'll have to pay the minimum fee.

Finally, many processors charge a fee covering the cost of issuing monthly credit card transaction summaries. These statements usually cost around $10.

If you don't think you'll be charging more than a few thousand a month, try to get a lower set-up and monthly or monthly minimum fee. At low volumes, these two fees can significantly boost your effective discount rate.

Nonprofits that charge a lot more will want to reduce the per-transaction fees. The discount rate, which is often negotiable, is a good area to focus on. Also, the more your average charge ticket, the lower your rate will usually be. Therefore, you will want to err on the high side when estimating your average charge.

When getting pricing information, Milani from Consumers Union offers good advice. "Charges from processors are very confusing. I compare all the different information different processors send me, but then I send them pro formas based on what charges we will actually process. Then I'll see what the real charge would be."

Customer service

The best rates in the world won't compensate for lack of customer service. The best way to learn about a provider's level of customer service is through referrals. You'll want to get referrals from nonprofits that are current clients and are of similar size.

You'll want to know if the processor has a 24-hour help desk, and how long it takes them to answer calls. Also, you'll want to know how helpful they are when they answer calls.

Making a potential donor wait while you get information on running his card can cost you a donation. Some processors have help desks, where anyone in the pool might be assigned to you. Other processors, like Global Payments, assign managers to your account. Even if you don't reach your manager, you will have an individual who will be accountable for you.

Another issue is reports. Many processors provide only monthly reports, but you might want reports for different periods. Some processors provide up-to-the-minute reports via the Internet.

Finally, you'll want to know how long it will take you to get access to the funds. It usually takes a day or two, but for some transactions -- like Internet or telephone transactions -- it can take longern

Natalie Gardner is a Little Rock, Ark.-based business writer.