Online Payment Systems

October 1, 2011       Mark Hrywna      

Fundraising used to be pretty simple. Your organization would send a solicitation and you’d wait for those checks to arrive in the mail. It wasn’t exactly as easy as turning on a faucet but it was simple: Mail letter. Receive letter. Cash check.

Today, there’s an entirely new front in the battle for donations that didn’t even exist 15 or 20 years ago. In addition to those checks you might still get from donors, you have to think about processing payments online.

Like any endeavor, nonprofits have to consider what it is they’re trying to accomplish when they consider online processing vendors. Whether it’s a small nonprofit being able to accept online transactions or a more nuanced organization aiming to improve the conversion rates of its online donation form, these are questions your charity must ask.

Credit card processing online is a commodity, said Jim Barney, vice president of sales and marketing at Blacksburg, Va.-based Click & Pledge. “You can go to 500 different places and someone will open a merchant account for you. It’s easy to find the lowest price, just shop around. The key to getting value is, what do you get with it,” he said. For a nonprofit, it’s not always about getting the cheapest price on credit card processing fees, he said, but about the software and tools to help make it more successful.

Every payment processor in the industry has core competencies and different features for clients, said Nim Patel, CEO of Mobile Accord in Denver. But when examining mobile payment processing, things to consider include services, the reliability of the system and its overall strength. Large nonprofits have to remember that they have some sway, which could help them get a better rate. “The nonprofit market is not completely ignored by these guys (credit card companies). For larger organizations, the thing they need to realize is they do have some purchasing power. They shouldn’t take what’s offered at face value, try to negotiate,” said Hayden Stewart, vice president of information technology at online fundraising firm Convio in Austin, Texas.

Nonprofits can use PayPal as a donation method within their other providers. “We plug in to your existing solution, and work with the partner you use to power your donation form,” said Clam Lorez, director, nonprofit engagement, at PayPal. “There are a lot of small nonprofits that use PayPal donate buttons as an off-the-shelf solution for their really basic needs,” he said. Other nonprofits use a suite of PayPal products, handling all different types of transactions. PayPal has more than 200,000 nonprofit accounts and handled almost $1.8 billion in transactions for nonprofits last year.

The nonprofit rate for PayPal is 2.2 percent plus 30 cents per transaction and larger volumes of more than $100,000 per month can lead to more competitive pricing, Lorenz said. Average payment processing fees are typically no more than 3 percent depending on the type of solutions, according to Steve Klein, vice president of payment business at Charleston, S.C.-based Blackbaud, in addition to various setup or monthly fees. Blackbaud’s processing fee is 2.598 percent, plus 26 cents, for all completed transactions.

Another thing to keep an eye on is whether your nonprofit is being hit with fees only on completed transactions, or even on attempted transactions. Sometimes an online donation form may be clicked but the transaction is not completed — either because of a wrong address or some piece of data. But, some vendors, according to Klein, might still charge a fee for the dropped transaction.

Criminals attempting credit card fraud sometimes test a stolen card at online donation forms. There also might be charges for secure storage of credit card data. “You want to understand, going in with your eyes open, what’s included,” when it comes to fee structures, Klein said. When it comes to merchant service accounts, be on the look out for assorted fees, according Convio’s Stewart. While processing fees might run in the neighborhood of 2.5 percent (3.5 percent for American Express), there also are “little nibbles off the edges,” he said, including monthly fees, per transaction fees or gateway fees.

Small nonprofits could end up with monthly fees that are bigger than all of their transaction fees, Stewart said, so it’s important to examine the best combination of percentages and other fees.

Organizations shouldn’t solely focus on gaining the lowest cost when it comes to negotiating banking fees. According to Greg Hammermaster, president of Sage Payment Solutions, the payments division for Sage North America, “Payment systems have become very complex due to the connected world in which we live. The standalone, dial-up point-of-sale (POS) terminal is being replaced by IP (Internet protocol) terminals, PC and Web apps, and smart phones that are all “hot” or connected.” This creates a world of increased security and regulatory requirements, he said, “that some payment vendors are unable to navigate or, worse, ignore, putting their customers at risk. And, the answer isn’t to go back to the standalone, dial-up POS terminal, as these new, “hot” connected devices can help increase fundraising channels, offer a host of loyalty and marketing-driven opportunities, and help decrease back-office costs.”

Another thing to consider is whether your vendor is actually holding your cash, said Stewart, as there are those that hold the cash until sending a monthly or semimonthly check to their nonprofit client. It could potentially be an issue of earning interest on the nonprofit’s money.

“It’s a small percentage but one that might be important to the client,” he said. When looking at payment solutions, a key driver for nonprofits should be managing their data efficiently, according to Blackbaud’s Klein. He recommends a provider that’s integrated with data and payment solutions in one place and a database and back-office elsewhere, to save time for the organization by not having to enter data twice.

Klein suggests looking at reconciliation costs and the different pricing methodologies. To really understand that cost, he said, look at everything a provider is charging you in a monthly statement and the total fees withheld and the total funds. The true effective rate is around 2 percent but after adding in different fees and pricing structures, many times it can be significantly more.

“You’ve got to look at the total picture,” said Klein. What other costs are there, like card-type fees that don’t qualify for low, introductory rates, or per- authorization fees, deposit fees for each time you make a deposit. It’s also important to consider if it’s a rewards card or corporate card, which generally tack on additional fees. “Try to reconcile against what you think is transacted,” Klein said.

Federal legislation regarding credit cards could impact the wholesale costs of payment processing if new fees are introduced on new cards, said Klein. During the past five years, costs for the industry have gone up — with additional requirements such as PCI (Payment Card Industry) standards and storing and encrypting credit card data. Klein is hoping to see some stabilization soon.

Click & Pledge offers plans that range in monthly fees of $5, $15 and $25. The cheapest fee has a higher per-transaction cost (4.5 percent plus 35 cents per transaction), which declines with a higher monthly fee (from 3.75 percent and 30 cents per transaction to 2.85 percent and 27 cents). The least expensive option — a $5 monthly fee and 4.5 percent plus 35 cents per transaction — is a reasonable way to get access to software, Barney said, while the difference between the more expensive options — 2.85 percent and 4.5 percent per transaction — offsets the higher $25 monthly fee, he said.

Mobile Accord recently announced a partnership with PayFone to provide alternative payment options through mGive on computers, smartphones and tablets. The arrangement will allow nonprofits to give donors the ability to make donations by text with one click, and possibly set their own donation amount rather than a fixed ask of $10 or $25 level, Patel said. Typical fees are 35 cents, plus 3.5 percent, per transaction, meaning about 70 cents in processing fees for a $10 donation. The donation, however, is just part of the interaction that nonprofits should have, Patel said. “Once you have the donation, capture some information from that user so you have the ability to continue to communicate with them,” he said.

The industry has taken leaps and bounds forward in the idea that technology and these tools are available now, where 10 years ago, they had to spend a significant amount of money to access this type of technology.

“The breadth, scope and value of service has evolved immensely,” said Barney. Regardless of size, any nonprofit has no restrictions on being able to access powerful technology that can be put to work for no cost. “Any nonprofit that says they can’t afford the technology of online fundraising hasn’t looked,” he said.

“Everybody realizes how powerful and important the online functionality is. The first place anyone goes to find a nonprofit is that storefront, which is their website,” he said. People are much more comfortable doing things online, with the security of being able to trust it and the convenience, he added.

Donors can do so much more online today, including make a payment, sign up for a fundraising event and get directions to a venue, download a receipt, create name badges or bar codes for security.

The next frontier appears to be mobile. Mobile commerce has the potential to launch the next explosion of mobile giving, Lorenz said. eBay is on track to do $4 billion in sales on smartphones this year, compared to zero only four years ago, and PayPal will handle $3 billion in mobile transactions this year.

After a couple of years of experiments, nonprofits are realizing the limitations of text giving, Lorenz said. “There’s a lot of conversation and interest about what’s next in mobile,” he said. “If you want to convert those email-based appeals into donations, you need to have a place where you can click on an email and it goes to a page tailored for that small screen,” he said. The long-term future is having nonprofits optimized for mobile because sending people to a plain old website to fill out a form will deter completion, he said.

The average number of clicks to enter credit card information is more than 30, Patel said, and once a user is past 10, dropout rates tend to jump. The key will be simplicity and the direct billing to carriers through one-click donations. NPT