Nonprofit ACH Payment Processing. The Ins and Outs of Direct Debit Payments

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1 Nonprofit ACH Payment Processing The Ins and Outs of Direct Debit Payments

2 Table of Contents Introduction Growth Trends in ACH Payments Benefits of ACH for Nonprofits Potential Weaknesses or Drawbacks of ACH Conclusions and Getting Started

3 ACH processing is growing in popularity with nonprofit organizations & offers many complementary benefits to credit card processing. 1 org/giving-usa-2014-report- Highlights-P114.aspx 2 Online-Fundraising-Goes/146619/ Introduction As consumer confidence grows across the globe, so too will donations and investments into nonprofit organizations. According to Giving USA s recent Giving USA 2014, total nonprofit contributions reached more than $335 billion in 2013, which was an estimated 4.4 percent increase in the United States 1. North American giving in general rose, which is a positive sign for nonprofit organizations, especially as economic strength continues to build moderately. Online donations in particular are gaining traction in the nonprofit sector. Thanks in part to the rapid development of digital technology, donors are finding it easier to contribute to the organizations they support. The Chronicle of Philanthropy found Internet fundraising from 100 of the largest nonprofits grew 13 percent in Citing the 2013 Blackbaud Index, the Chronicle reported online donations increased 14 percent last year, grossing $1.7 billion in the same time frame. Even small and mediumsized nonprofits grew their online donations. A Network for Good study said these organizations increased Internet giving by 20 percent year over year in While credit card processing is an important element of online fundraising, Automated Clearing House ACH (also known as direct debit) processing can also be a valuable consideration. ACH processing is growing in popularity with nonprofit organizations and offers many complementary benefits to credit card processing. This white paper will look at the benefits and potential drawbacks to ACH processing, specifically focusing on nonprofit usage of this service. 01

4 Growth Trends in ACH Payments It provides a cost-effective way to collect donations, and from a contributor s standpoint, they can create a payment schedule that best fits their needs. 3 com /industry-news/directdebit-payments-infographics/ infographic-direct-debitcapabilities-can-greatly As donations continue to rise, the need for a secure, reliable and powerful payment processor is particularly important. Nonprofits now have the ability to collect donations online in many different ways, which is highly advantageous in today s information age. Digital payments can be made through a nonprofit s online donation page using a credit card or through ACH which is consistently growing in popularity as a method of charitable giving. ACH payment processing is growing quickly in the nonprofit sector for a number of reasons. It provides a cost-effective way to collect donations, and from a contributor s standpoint, they can create a payment schedule that best fits their needs. Although its perceived benefits are plentiful, nonprofits still must understand the potential drawbacks, including user perception of ACH payment security. While some donors may not be sure of ACH processing, it s important to note ACH transactions account for a growing percentage of payments for nonprofit and for profit payments. In fact, a recent iats Payments infographic found the value of ACH payments as a percentage of overall noncash transactions increased nearly 10 percent between 2009 and In the fourth quarter of 2013, ACH payments in the U.S. alone accounted for 4.5 billion in total transactions, or a sum of $9.8 billion, which was a 5 percent quarter-over-quarter increase. Across the Atlantic, direct debit in the U.K. is a major part of how everyday consumers make payments. In fact, two-thirds of households pay bills using direct debit, which led to more than 5.6 billion ACH payments in Certainly, convenience has helped in the growth of nonprofit direct debit payments, but as donors continue to feel safer making contributions online, it s likely the growth of ACH payments will keep trending upward in the years to come. 02

5 The rise in popularity of electronic payments makes direct debit a great option for nonprofits to offer as a payment method on their online donation form. Benefits of ACH for Nonprofits For a nonprofit organization, offering direct debit is an incredibly costeffective way to accept donations, especially for recurring payments or large transactions. Nonprofit organizations have been accepting direct debit payments in the form of a signed form and a voided check for ages, but the rise in popularity of electronic payments makes direct debit a great option for nonprofits to offer as a payment method on their online donation form. The fee structure involved with direct debit is typically a flat per-transaction fee rather than a percentage of the volume processed, as is the standard with all major credit cards. This has a huge impact when you consider the recipient of the funds the nonprofit organization would likely pay the same transaction fee no matter the size of the donation, be it $20 or $2,000. If those donations were made by credit card, the nonprofit would pay standard merchant rates on top of other fees, depending on the agreement they have with their payment processor. In the end, the cost effectiveness of direct debit makes it an attractive payment option for nonprofit organizations to offer to their contributors. The last thing a nonprofit wants to encounter is a rejected transaction. A rejected transaction can occur for any number of reasons, including a lack of funds, personal limits individuals put on how much they can spend per account, a credit card limit or a card company temporarily suspending an account due to a security breach, to name a few. Whatever the case may be, nonprofits can t afford to have a donation declined, especially if they re relying on a specific gift to move the organization forward. While credit card payments are simple and what most donors are used 03

6 to, they can cause payment issues for recurring transactions. What s more, donors can change credit cards frequently, which can further complicate things for all parties involved. Charities may experience rejected transactions and then have to contact individual donors to requested updated card information. This can be time consuming and may result in donors cancelling their recurring gift. Direct debit payments, on the other hand,can ease the concern of rejected payments for nonprofits for a number of reasons. The beauty of ACH processing lies in its consistency. While donors may get new credit cards on an annual basis, they don t often change their bank accounts, which is a big advantage of direct debit processing. Reducing the number of rejected transactions by offering ACH as a payment method can have a big impact on the success of fundraising efforts. When compared to credit card processing, direct debit payments have the upper hand simply because donors change their bank accounts far less frequently than they change their credit cards. As a result, a more consistent stream of low cost fundraising revenue can be formed for the nonprofit. Additionally, there are particular types of credit card fraud that unfortunately target charities. Fraudsters can use online donation forms to test stolen credit card numbers or make fraudulent donations, then requesting strange or complicated refunds. Addressing these types of fraud can be troublesome and costly for charities. ACH transactions experience less fraud attempts overall than credit cards, which is another advantage to using this payment method to process your donor s gifts. Religious organizations often choose ACH as the payment method for their monthly giving programs. This speaks to another big advantage of ACH over credit card use, which is consumer debt reduction. Many individuals are seeking to change financial spending habits by reducing their dependence on credit cards. Offering automated bank account withdrawals as a payment option for online donations could be a very attractive option to many donors. Donors change their bank accounts far less frequently than they change their credit cards. As a result, a more consistent stream of low cost fundraising revenue can be formed for the nonprofit. 04

7 Potential Weaknesses or Drawbacks of ACH It could take anywhere between three and 45 days to decline or return the transaction if the donor enters their bank account details incorrectly or does not have adequate funds. Although direct debit is a secure and cost-effective way to make and accept payments online and for a recurring giving program, certain individuals may be uncomfortable with the idea of entering their bank account information into an online form due to perceived security concerns. This is an unfortunate misconception since ACH transactions are treated with the same level of security as credit card transactions. Additionally, the process of entering all of the required details for direct debit into an online form may be a little intimidating. A suggested best practice to minimize this intimidation factor is to offer a visual representation of a printed check to identify where the donor can find the bank account details. Regardless, manually entering bank account information will likely take the average donor longer than inputting his or her credit card number and expiration date. It s difficult to measure how many donors will simply give up before completing the transaction. Most payment processors will remit funds processed by ACH or direct debit within 4 to ten days, which is longer than the typical remittance schedule for payments made by major credit cards. Additionally, it s not possible to provide real-time or instant approval for direct debit payments. It could take anywhere between three and 45 days to decline or return the transaction if the donor enters their bank account details incorrectly or does not have adequate funds. There are fees involved with returned direct debit payments, just like there are fees involved with credit card chargebacks. However, ACH return fees are substantially lower than those charged for credit cards. 05

8 Conclusions and Getting Started Giving donors the payment options they may want is becoming an industry best practice. Giving donors the payment options they may want is becoming an industry best practice. An easier, more convenient approach to completing an online donation shows donors that the nonprofit values having multiple options to choose from. The ease and flexibility of ACH payment processing is being realized in the nonprofit industry, which is one reason why online fundraising is continually growing year over year. Nonprofit organizations that wish to offer ACH as a payment method can start by approaching their current merchant services provider to see if they offer direct debit processing services. Additionally, most major banks offer ACH processing services, so it could be worth looking into what type of services are available through the nonprofit s existing banking relationship. Offering direct debit as a payment method (especially in an online payment form) is a safe, efficient and cost-effective way to support and enhance online fundraising efforts. 06

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