Over the last couple of weeks I have learned a tremendous amount about payment processing. It is an intriguing field since it is utilized by everyone that holds a credit card and every organization that processes credit cards, yet very few people fundamentally understand how transactions get authorized, processed and settled.
This lack of understanding creates confusion in the market about how to compare different payment processing solutions to choose a payment processor that is the cheapest, most efficient to manage, or ultimately creates the best value for your organization. People responsible for choosing a payment processor typically feel like they are comparing apples to oranges?! Why is this?
Buyer Beware: Credit Card Processing Fees
Let’s take a quick review of fees that are typically assessed by payment processing providers to get a broad understanding of where your cents may be going.
|Fee Type||What does this mean?|
|Credit Card Interchange Fees||Interchange is a fee paid by the Visa or MasterCard member institution that processes the transaction on behalf of the merchant (you, the fee is also passed onto you) to the member institution that issued the card to the consumer (your donor). These rates vary widely based on transaction medium (card present or card not present) and transaction qualification (swiped or hand keyed, settlement timeframe, etc). Here is an example of interchange fees charged by Visa and MasterCard. Complicated, eh?|
|Assessment Fees||These are fees charged by Visa and MasterCard to you and issuers as part of membership. Currently this fee is fixed at .0925% for Visa and .095% for MasterCard.|
|Authorization Fees||This is the amount charged to the merchant (you) every time your software contacts the authorizing network. These fees are for successful donations, refunds, and even for failed transactions.|
|Settlement Fees or Statement||This is a fee that is charged when your merchant provider deposits settled transactions into your account.|
|Gateway Fees||This is a fee that is charged in order to access the payment gateway for the merchant provider. Typically there is a “per transaction” fee and a monthly charge.|
It is also worth understanding that Payment Processing Providers charge these fees in different methods:
|“One Time” or “Setup Fees”||These fees are charged in order to setup or initiate a relationship with a payment processing provider. It is common for payment providers to advertise $0.00 in setup fees. Be aware, sometimes payment processors offer free setup but charge application fees.|
|Recurring Fixed Fees||These are ongoing fees that are typically charged on a monthly basis. It is common for payment processors to charge a fixed Settlement or Statement fee and Gateway that must be paid every month.|
|Recurring Variable Fees||These fees vary based on the amount of volume that you are processing and the types of cards being used. Interchange, Assessment, and Authorization fees fall into this category.|
Calculating Your Effective Transaction Rate
With all these fees it is very difficult for purchasers to effectively evaluate which payment processing vendors are the best fit for their organization. Due to the convoluted nature of how the payment processors assess fees, I recommend that you do not rely on what the payment processor tells you they are going to charge you. Instead, calculate your own effective transaction rate. This can be done very easily by taking a monthly statement from your payment providers and doing the following calculation:
|Effective transaction rate = Total $ in fees charged by payment processor ÷ Total $ Processed|
* Merchants need to include ALL payment processing related fees to see their “effective rate” in doing a “true” apples to apples comparison.
Many people are very surprised to see that their effective transaction rate is between 3.1% – 3.5%, when they were promised a much lower rate. If you are evaluating a new payment processor ask them for the expense statement from a customer with similar volume so you can see the true expenses then calculate your own effective transaction rate.
Additional Expenses: Staff Time
Aside from payment processing fees, you should also be cognizant of the business process and staff time that it takes to maintain the ongoing reconciliation between transactions your online fundraising solution accepts and the money that shows up in your merchant account. For organizations that receive significant volume of online contributions staff can spend hours to days each week reconciling the money received via their merchant accounts.
I recommend that you plan what your business process will be for refunds, chargebacks, and reconciliation and make sure that you have a good handle on who will be responsible for these activities and the time commitment that it will take to manage these processes.
Shameless Blackbaud Plug
Over at Blackbaud, we are committed to making your life simpler and cheaper with regards to payment processing. We have developed a blended rate for payment processing that takes into account ALL the fees listed above. For Sphere we offer 2.59% + .26 cents per transaction.
Also we have developed a simple process for customers to reconcile the cash they receive once every two weeks, which is currently utilized by over 2,000 nonprofits. We automatically deposit your money in your account and send you a statement that lists all of your transactions and your total expenses. You can export all of your online donors and their gifts directly from Sphere if needed.
Do you have payment processing question that you would like answered by a Blackbaud payment processing expert? Post a comment below…