One easy way to keep more of what you raise
Thursday, December 03, 2015
When fundraising is your sole source of income, it is critical you keep every penny you can of what you raise. Yet many nonprofits give away too much of what they raise every time they process a credit card donation. One easy way to keep more of your donations is to demand interchange plus pricing from your credit card processor.
What is the true cost to process a credit card?
When taking payments via credit card, either online or in-person, there are a lot of parties involved. You have the donor, the nonprofit, the merchant service provider (MSP) and the credit card networks.
A MSP provides nonprofits with the permission and services needed to accept electronic payments. The credit card networks include all the credit card companies, such as Visa, MasterCard and Discover.
When accepting any sort of electronic payment there is a cost – the interchange fee. This fee is determined by the credit card companies and is different for every card (Visa rates, MasterCard rates). For example, credit cards have a higher fee than debit cards and reward cards are higher than basic credit cards.
An interchange rate, charged from the credit card companies to the MSP, will always have two components: a percentage fee of the sale and a per transaction fee. It can be written as follows:
- 1.35% + $0.10
Every MSP pays this wholesale interchange rate. MSPs also pay a small fee to credit card associations called a card-brand fee. How the MSP marks up these wholesale rates into their retail plans determines how you much you will pay to process your donations, and thus how much you can keep of what you raise from donors.
Please note there are usually fees charged for using an online fundraising platform but our discussion below will focus on the credit card processing costs and how to reduce those.
Tiered and flat-rate pricing – Just say no.
Whether you use 4aGoodCause to set up your online fundraising platform or another company, you probably will have two or three pricing options for processing a debit or credit card: interchange plus, tiered pricing or flat-rate pricing.
Tiered pricing works on a system of “qualification.” Credit cards are grouped together into tiers or buckets with each tier being a different rate. Merchants are offered a “qualified” rate for their transactions, which is usually low and enticing, but there are many cards and transactions that are “non-qualified.” Nonprofits are at the mercy of the MSP when a “non-qualified” transaction occurs – the fee they have to pay on “non-qualified” transactions could be anything.
It’s not that tiered pricing is inherently bad. It’s just that tiered pricing models typically don’t disclose the underlying interchange rates – which incentivizes merchant service providers to overcharge their merchants.
There are also MSPs, like Square or Stripe, that charge one flat-rate for all transactions. Most of these flat rates are around 3% but can go up to 5% at some peer-to-peer fundraising providers. Flat-rate pricing only works for small nonprofits that have a very low volume or have limited fundraising needs and when the flat rate is given in exchange for no monthly fees. Nonprofits that do sustained fundraising will overpay time and time again on a flat-rate plan.
Why interchange plus is better
Interchange plus pricing works by adding a constant, flat margin on top of the interchange rate. It is a cost-plus model where the wholesale rate for that card is passed through to the nonprofit and the MSP adds a small flat margin for itself. It’s widely considered the fairest model in the industry. Here’s why:
As mentioned above, tiered pricing plans include “non-qualified” or discretionary rates added by the MSP. MSPs do not have to disclose these rates meaning nonprofits have no idea how much they could be charged on any given donation. Interchange plus pricing is transparent. For example, our trusted MSP, Dharma Merchant Services, charges our clients a processing fee of the interchange rate plus 0.3% + $0.15 per transaction. No hidden fees. That is what our good causes pay every time.
Process debit cards at lower cost
I mentioned before it is less expensive for a MSP to process a debit card versus a credit card. Some debit card interchange rates are even regulated by the government and can be as low as 0.05%. Even when you add a small margin like 0.3% for the MSP you can process some debit cards for fees of less than 1%. Comparing that to flat rates of 3-5% and you can see how the savings can add up quickly.
You will always receive charity rates
Typically, nonprofits on tiered or flat-rate pricing plans won’t see charity fee reductions, as most of those models don’t take into account if a merchant is a nonprofit or not – and these rates can make a big difference. Visa, in particular, offers great charity discounts. Their charity rate is 1.35% versus their other rates:
- CPS Retail (1.51%)
- Rewards 1 (1.65%)
- Rewards 2 (1.95%)
- Signature Preferred (2.10%)
- Signature Preferred 2 (2.40%)
So while nonprofits on a tiered plan could be paying 2.40% or more for a Visa transaction, nonprofits on an interchange plus plan can take advantage of the 1.35% interchange rate.
Example of interchange plus versus tiered pricing
I know all these numbers can be overwhelming, but here is one last example from Dharma Merchant Services to help you understand how interchange plus can save your nonprofit money.
A donor uses a Visa Rewards card to donate $100 (online) to your good cause.
The underlying rate for this card is 1.65% + $0.10, and you have a “qualified” rate of 1.79% + $0.15. This means that certain cards will “qualify” for the low rate, but most won’t. Rewards cards often do not qualify, so in addition to the underlying rate, you pay the “qualified” rate, the “non-qualified” rate and card brand fee.
- Estimated qualified rate: 1.79% + $0.10
- Estimated “non-qualified” rate: 1.54% + $0.08
- Card brand fee: 0.13% + $0.02
Total: 3.46% + $0.20
With a $100 donation, you are charged $3.66.
Interchange plus pricing:
Once again, the underlying rate for this card is 1.65% + $0.10, but the underlying charity rate is 1.35% + $0.10. The Dharma interchange plus fee is 0.3% + $0.15 – always. Here is the breakdown:
- Underlying charity rate: 1.35% + $0.10
- Interchange plus fee: 0.3% + $0.15
- Card brand fee: 0.13% + $0.02
Total: 1.78% + $0.27
With a $100 donation, you are charged $2.05. You just saved $1.61 on this transaction! Imagine how these saving can add up over time.