Let’s Make A Deal: Negotiating With Payment Processors

March 19, 2014       Zach Halper      

When you go to the website for Acteva, an online payment processor in San Francisco, Calif., the review blurbs that scroll across the page are all complimentary. While the site paints a wonderful picture of the services, the reality is much more complicated.

Pankaj Gupta, CEO of Acteva, recently acknowledged publically that the company owes up to a combined $5 million to multiple charities. The company had received complaints from organizations that claimed they had not received cash processed through the service.

A call to Gupta at Acteva was not returned. In a report published in The San Francisco Public Press, Gupta claimed that this was the result of cash-flow problems and that he would be able to pay back the money by taking on new clients and developing new software.

This plan, however, hasn’t stopped some websites from dropping information about Acteva. This includes the technology nonprofit Idealware. Elizabeth Pope, director of research and operations at the Portland, Maine or­ganization, said the decision to drop Acteva was made in spring of last year after fielding numerous emails “from folks saying they hadn’t been paid what they were owed.”

Pope noted that Idealware, which acts as a Consumer Reports-like advisor on technology for nonprofits, rarely takes this sort of action but decided to do so because of the overwhelming amount of information regarding the company’s financial issues. While Idealware did not do independent work to confirm all of the allegations against Acteva, Pope said they had to make the move to remove the company as one of their recommended products.

“We didn’t want to make recommendations of those companies that don’t seem financially stable,” she explained.

Even if Acteva resolves all of its issues, Pope said it was unlikely they would be put back on the website. “It would probably take a lot for them to be listed again,” she said.

According to Clam Lorenz, general manager of nonprofit services at PayPal, the timing of payments depends on the type of company. He explained that there are multiple types of processing firms:

  • Those that only provide acquiring and processing services;
  • Companies such as PayPal that provide both payments and the payment flow experience; and,
  • Companies that provide a full custom donation form (or website, or CRM, etc).

“Although a charity can get online donation processing from any of these, the range of services, business models, and consequently the cost structures for the nonprofit, vary widely across these types,” explained Lorenz. “Policies around release of funds would potentially vary as well.”

To make sure you have a clear idea about when you would be receiving funds, Lorenz said to ask specific questions during negotiations.

Nick Bencivenga, senior vice president at Dharma Merchant Services, agreed with this point. “Check a company out. If they practice what they preach, they won’t be afraid to answer questions,” he said, adding that his company processes payments within two business days.

Besides donation processing timeframes, Allyson Bliss, relationship manager at TechSoup Global in San Francisco, said that another thing to look out for in negotiations are hidden costs.

“A lot of people look at the rates they are quoted but they might not get the advertised rate because of hidden fees (listed in the fine print),” said Bliss. “Those take the biggest bites out of your wallet.” While Bliss said the payment processing industry has become a lot more transparent in this regard, she reiterated that you need to pay attention to the fine print.

“It’s easy for a provider to offer you a low rate while loading the contract with hidden fees,” said Bencivenga.

Pricing is usually among the key concerns Bencivenga said that he hears from clients regarding payment processing. It can be hard to compare prices because of the payment structure that is standard for the industry. Called Interchange, this fee is paid between banks for the acceptance of card-based transactions.

While the industry has evolved over time to simplify this system, according to Bencivenga, it has only made things somewhat of a challenge for consumers. “It ends up the provider being able to charge whatever they please,” he explained.

Dharma uses a variation of this system called Interchange Plus, which Bliss said is much more transparent since consumers will be told up front the rate they will be paying on Interchange. Interchange-plus pricing works by adding a constant, flat margin on top of Interchange. Typically, Interchange-plus pricing models will also be written in the two-component format, with a percentage fee and per-transaction fee above interchange. On a typical $100 transaction, a nonprofit would pay about $1.92 in fees on average, on top of Dharma’s $15 monthly fee.

According to Lorenz, some payment processors offer a low Interchange rate, but offset that with extensive fees for account maintenance, reporting, even calls to customer service.

“All of those fees can have a significant impact on the average rate an organization pays per donation, and it can take a lot of work to actually figure out what you’re paying,” explained Lorenz.

PayPal uses an Interchange Rate of 2.2 percent + 30 cents for all registered nonprofits, which Lorenz said is designed to make it easier for charities to understand what they will be charged.

Idealware’s Pope said that it’s important to ensure that the company accepts a wide variety of payment methods and that they are compatible with the donate now buttons or other payment features on an organization’s website. She also said the processor needs proper security protocols in place and good fraud prevention systems.

TechSoup’s Bliss, meanwhile, said that contract length should be a big consideration. Most of the nonprofit managers she has spoken with expressed concern about being trapped in a long contract with a payment processor. This concern arises from the days when a three-year contract was typical and could only be broken by paying a huge fee. Bliss said these termination fees are “slowly” going away, though it is far from standard at this point.

“It’s very important not to get stuck in a long-term contract,” said Bencivenga. “It’s a big red flag if a provider isn’t willing to waive the termination fee.”

All of these experts agreed that the best way to get a good payment processing deal starts with research. The allegations that have been leveled against Acteva show that you can never do too much homework in this industry, said Pope.

“It’s a really good wake-up call for these agreements that nonprofits are entering,” she said. “It’s a reminder to do due diligence, call around, and do investigation on anyone you are working with.”

“It’s a double-edged sword,” Bliss said about how payment processing has changed over the years. “The complexities have increased and that can be daunting, but on the other hand you have all of these great options to choose from.”

Bencivenga stressed the importance of asking as many questions as possible when talking with providers, whether it’s about rates, termination fees, or any other concerns you have. “All those kinds of things are what a reputable company will be happy to answer,” he said.

“The bottom line for the nonprofit remains the same: Ask a lot of questions, get specific examples, make sure you understand the difference between what each kind of provider offers,” said Lorenz. “And if you’re not happy, shop around for another option. Payments is just one part of successful online fundraising, and the best providers will make the payment piece safe, easy and fast for the charity and their donors.”  NPT