Choosing an online donation system for your financial management for nonprofits comes with very important decisions to make. Donors are now expecting to have an easy way to donate to your nonprofit by using their credit or debit cards. By adding the feature of accepting donations through your website, you open doors to make it easier to campaign to your donors through email campaigns, social media campaigns, and other online campaigns. By doing this, you are encouraging respondents to easily donate to your nonprofit immediately.
Even though you are making the process easier for your donors, it can be difficult choosing your online donation processing system. This can be confusing, especially if you have never dealt with merchant accounts or aggregators. RBP Methods is here to provide you with a guide for your financial management for nonprofits team to understand the difference and choose between the two most commonly used online donation systems: merchant accounts and aggregators.
How Accepting Online Payments Works
Mostly everyone has experienced the purchasing of online goods or services. Some have also experienced donating online. You may be familiar with how the donation systems work on the front end, as you have interacted with the donation system directly. However, behind the scenes is a different story. The process of completing a credit card transaction online with a network of information that is shared by multiple parties is complex.
After you have entered your credit card information and have clicked “pay” or “order,” your credit card information is then encrypted for security purposes and sent to either a merchant account or an aggregator. The purchase is then verified by either a merchant account or an aggregator and then processed fully for a complete transaction.
The Difference Between a Merchant Account and an Aggregator
Merchant accounts are created by an acquirer, or more casually known as a merchant bank. Your nonprofit will have its own merchant account. The bank will take the responsibility of settling and depositing funds into your nonprofit’s bank account. The unique aspect of merchant accounts is that funds are immediately deposited into your account before the bank even receives the funds. Because of this, applying for a merchant account is much like applying for credit or a loan. Before an acquirer can sign a contract with your nonprofit, it needs to be determined that you can cover the potential fees or fraudulent transactions.
An aggregator is a service provider that processes payments through shared accounts. They allow multiple entities, such as merchants, nonprofits, and other organizations to accept credit card payments and bank transfers without needing to set up a private merchant account. The aggregator creates an agreement with a merchant bank and conglomerates multiple organizations under one account. Aggregators have a quick set-up and can accept higher-risk organizations because they are dealing with multiple entities under one account.
Which Processing System Is Better for Financial Management for Nonprofits?
There is not a clear-cut choice as to whether a merchant account or an aggregator is better for financial management for nonprofits. There are pros and cons to each and we have the two payment models compared below over five categories.
- Setting up payments: Merchant accounts have a tedious application and approval process. The process to set up an aggregator account is faster and may be easier for new nonprofits, or those with a limited credit history.
- Payment processing: Merchant accounts are known to have better customer service than aggregators due to the fact that they are less likely to interrupt your account. They are more likely to alert you, rather than freezing your account due to irregular activity. Because aggregators accept risky clients, they are less willing to take chances of fraud.
- Fees: Fees vary with both merchant accounts and aggregators. Merchant accounts are more flexible, and therefore more competitive with their rates. Whereas, aggregators are not allowed to be flexible and typically have fixed rates. Aggregators charge more, because they have to assume a greater risk is being taken when they accept clients and their transactions.
- Size: It may be better to start off with an aggregator if you are a smaller nonprofit, or an organization who anticipates fewer donations. Merchant accounts may require estimates on transaction sizes and quantities and will base their fees on the estimates given to them.
- Fraud prevention: Aggregators serve a wide range of organizations and process many transactions. This makes them on high alert. Merchant accounts also pay attention to fraud, but offer more customized fraud prevention to block those whom are trying to steal credit card information from less secure donation forms. A merchant account provider will reach out to you if necessary, but aggregators may close your account if they suspect any suspicions of fraudulent behavior.
How to Choose the Best Fit for your Nonprofit?
Your financial management for nonprofits team should ask themselves five questions to determine the best fit for your nonprofit.
Be sure to count 1 point for every “yes” answer.
- Is this the first time you are accepting donations online for your nonprofit?
- Is your nonprofit newly incorporated?
- Do you expect only a few donations online each year?
- Do you usually receive multiple small donations instead of big donations?
- Has your nonprofit ever experienced online fraud?
- 0 – A merchant account is most likely to be your best choice.
- 1-2 – A merchant account is still most likely your best choice, even though it may take a little longer to approve your account.
- 3-4 – Your nonprofit will most likely benefit the most by choosing to work with an aggregator.
- 5 – An aggregator is most likely to be your best choice.
While exploring your options and how to grow your nonprofit by adding online donations to your website, it would be wise to remember that mobile apps can accept donations. Card readers can make it easier to accept payments on a smartphone or tablet at a variety of events.
As your financial management for nonprofits team works together to determine the best option to accept online donations for your nonprofit, be sure to weigh all your options. Take the time to compare the services and rates of merchant accounts to an aggregator. Be sure the cost of adding online donations to your nonprofit will not burden your organization financially. The benefits must always outweigh the risks and costs.
RBP Methods provides accounting software, advice, and consulting in financial management for nonprofits. Our financial management systems include software such as Abila MIP Fund Accounting™ and AccuFund Accounting Suite. These and other software solutions for nonprofit organizations provide easy to use, understandable, and useful software to track finances for nonprofits, manage donations, donor campaigns, and much more. Contact us or call 503-648-9051 for a consultation.