A merchant account is a type of account that allows an entity to accept payments by credit and debit cards. Nonprofit financial managers might wish to avoid the complexities associated with establishing their merchant accounts and decide to outsource the credit card processing function.

The advantages of outsourcing credit card processing include ease of set-up, simplicity of fee structure, acceptance of all credit cards, robust fraud protection features and compliance with the Payment Card Industry Data Security Standards (PCI Compliance). There are third-party credit card processors specializing in providing services to nonprofit organizations that offer a wide array of services that help support fundraising efforts.

The set-up associated with outsourcing credit card processing to a third-party vendor is relatively simple. Third-party credit card processing contracts are straightforward requiring a small amount of legal review prior to signing. No credit card check is required when outsourcing credit card processing to a third party.

Outsourcing credit card processing might be a slightly more expensive option than obtaining a merchant account. However, the fees associated with outsourcing credit card processing are easily quantifiable and, for the most part, based on a percentage of the payment amount or a flat per transaction fee. Another advantage to outsourcing credit card processing is that all credit card types are accepted.

An organization is required to undergo a credit review when procuring its own merchant account since the entity issuing the merchant account is taking financial risk when a cardholder disputes a transaction. The fees affiliated with acquiring a merchant account can be very complicated and can add up rather quickly.

The terminology used by varying institutions issuing merchant accounts is inconsistent making it difficult to compare pricing. Merchant account fees include start-up fees to establish the account, ongoing fees to keep the account available, per item fees and transaction fees. There are also fees based on the type of card used, the processing method (whether the card is keyed or swiped) and whether a transaction passes certain fraud prevention tests.

Not all nonprofits need a merchant account. A large complex nonprofit organization with many different types and sources of revenue requiring complicated interfaces and reporting should most likely have its own merchant account. However, for many nonprofits the outsourcing of credit card processing is an affordable and viable option.

Credit card donations are a significant source of funding for many nonprofits and it is critical that managers select a third party credit card processing vendor that meets its needs. Before selecting a vendor, managers should:

• Obtain a thorough understanding of how donations will be processed;
• Consult with other financial managers within the nonprofit community that use the service of third party credit card processor; and,
• Choose a vendor that is known for its good customer service.

The effective fraud protection and PCI compliance features afforded by third-party credit card processor protects donor credit card information and provides a level of expertise in these areas that eliminates the need to have in-house technical knowledge to support these capabilities. This allows staff to focus more time on value added mission related activities.

There are both advantages and disadvantages to setting up a merchant account and to outsourcing the credit card processing function. It is up to financial managers to examine the issues noted above and make the decision for their particular nonprofit. Nonprofit managers should be able to determine through this examination whether the benefits of having their own merchant account exceed the costs.

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Amy West is chief financial officer of the nonprofit AHRC New York City.