Our nonprofit financial management tips continue with tips for choosing an online donation system. Most donors now expect to be able to donate online using their credit or debit cards. Accepting donations through your website makes it easier to run email campaigns, social media campaigns, and other campaigns online since you can encourage respondents to click through to donate immediately.
But, choosing your online donation processing system can be confusing, especially if you’ve never dealt with merchant accounts, bank card systems, or aggregator systems. Here, we provide you with a handy guide to online processors and how to choose between the two most commonly used systems by nonprofit organizations: merchant accounts and aggregators.
Accepting Online Payments: How It Works
Almost everyone reading this has purchased goods or services online, and most have also donated online. You’re familiar with how systems work from the front end or user interface.
Behind the scenes, however, there is a complex network of information shared by multiple parties to complete a credit card transaction online.
After clicking “pay” or “order”, your credit card information is encrypted for security purposes and sent to either a merchant account or an aggregator. They, in turn, verify the purchase and process it. Money may be sent to your bank account and the transaction is complete.
Merchant accounts are created by a merchant bank (called an acquirer). The bank settles and deposits the funds from the transaction into your bank account. They are responsible for ensuring that payment is rendered to your account once the transaction is approved.
An aggregator is a company that processes payments. They enable multiple entities such as merchants, nonprofits, and others to accept credit card payments and bank transfers without the need to set up a special merchant account. The aggregator forms an agreement with the merchant bank and batches multiple companies under their account for processing. In return, they assume a greater risk since they are dealing with multiple entities and may charge more for their services.
Which Is Better for Nonprofit Financial Management?
Neither a merchant bank account nor an aggregator is a clear-cut “better” choice for sound nonprofit financial management. There are pros and cons to each.
- Setting up payments: Merchant banks may have a lengthy due diligence and approval process. The process to set up an aggregator account is faster and less cumbersome. It may be easier for new nonprofits or those with a limited credit history to establish an aggregator account.
- Payment processing: Merchant banks provide somewhat better customer service than aggregators, although this varies. They are more likely to alert you rather than freezing your account due to suspicious activity, for example. Aggregators accept risky clients and therefore take few chances with potential fraudulent activity.
- Fees: Fees vary with both types of processors. Merchant banks may adjust their fees based on volume while aggregators typically have fixed fees. Generally, aggregators charge more because they assume greater risk when they accept clients and transactions.
- Size: Smaller nonprofits or those who anticipate few donations through credit cards may be better off starting with an aggregator. Merchant banks may require you to estimate transaction sizes and quantities and base fees upon those estimates.
- Fraud prevention: Aggregators are on high alert for fraud since they process so many transactions for a wide range of entities. Merchant banks also pay attention to potentially fraudulent transactions. However, aggregators are faster to pull the trigger and shut down an account if it hints at fraud, which could cripple your ability to accept donations, especially during a busy marketing campaign or donor season.
Choosing the Right Fit
Ask yourself the following questions to choose the best fit for your nonprofit?
Count 1 point for every “yes” answer.
- Is this the first time you are accepting donations online?
- Is your nonprofit newly incorporated?
- Do you expect only a handful of donations online each year?
- Do you tend to receive small donations rather than big donations? For example, donations of $5 – $25 rather than $100 – $1,000?
- Has your nonprofit every been the target of online fraud?
Score:
0 – A merchant bank is likely to be your best choice
1 – 2 – Merchant banks may take a bit of time to approve your account but are likely to be the best choice
3 – 4 – Your nonprofit may benefit the most from working with an aggregator.
5 – An aggregator is likely to be the best fit for your situation.
As you explore your options for accepting donations online, don’t forget about mobile apps for taking donations at events. Card readers, which transform a smartphone or tablet into a credit card processor, can make it easier to accept payments at charity events, dinners, and galas.
There are many options for nonprofit organizations to accept donations online. Whether you choose a merchant bank or an aggregator, be sure to shop around and take your time comparing services and rates. Read the fine print in any contracts and be sure that the rates aren’t going to be a burden for your organization. The benefits, as always, must outweigh the risks and costs of accepting donations online.
Beck & Company
We provide nonprofit financial management, auditing, and CPA services throughout the northeast region from our Washington, D.C. headquarters. If your nonprofit is looking for solid financial and accounting advice and services, contact us today.