What Are Payment Processors & What Do They Do (for Nonprofits)

January 31, 2023
7 minutes

Long most nonprofits received donations by check. Then, debit and credit card donations took center stage, and donors spent hours on the phone repeating their card codes. Now, it’s all about online payments, but... what is a payment processor? Today's the day that we learn together.

As a modern nonprofit organization, you need certain tools to handle online transactions smoothly and securely—but it’s a big, wide, and confusing digital world out there. That’s why we’ve got (totally jargon-free) guidance to help you navigate this rocky terrain. Just keep in mind that none of this is one-size-fits-all, so ask all the questions and take it slow.

What is payment processing? Our processing payment meaning:

Payment processing is when the nonprofit gets the money! It has little to nothing to do with the donor; it's all done on the back end by a company like Stripe or PayPal. The truly transformative part, though, is when the nonprofit takes the donations to make impact.

Before we get into all the gritty details of payment types and processors, there’s some fancy-schmancy lingo you should know. And this is just the beginning. We could go on and on about merchant accounts and ACH and blah, blah, blah until your eyes glazed over. Instead, think of this as a jumping-off point; it’s Payments Processing 101. Learn the ropes, then get ready to be the most popular guest at your next dinner party.

And what are payment processors? Our payment processor definition

Payment processors are the middle-person between your donors’ bank account and your organization’s account. Once you’ve paid for something with your digital funds, a nonprofit payment processor handles the actual transfer of funds, making sure the money gets where it needs to go, quickly and securely.

From movies and grocery shopping to museum tours and shark tracking, more and more of our lives have moved online in recent years. As a result, our wallets have, too. Today, more than four in five Americans use digital payments, and that number’s only rising (McKinsey). While it might seem scary—and while we’re still stubbornly paying cash at our local coffee shop—our finances are going digital, and that means we all need to up our e-payment know-how.

Is a merchant processor the same as a payment processor?

A merchant processor is the same thing as a payment processor, which is the same thing as merchant payment processors. In the for profit world, once the transaction is made on the customer's credit or debit card (if the business accepts card payments), the customer's bank sends funds to the merchant's bank and within a few business days, the money is in the business bank account.

What is a credit card processor? Is there a difference?

A credit card processor is the same thing as the merchant processor or the payment processor. The public generally uses these terms interchangeably, which is just as well since there's really no difference between the three. For our purposes, you can lump them together in the thesaurus of your mind.

What is a payment processing center & how does it fit into the process?

A payment processing center is... the payment processor. They receive donations and transactions from donors, process funds, and deliver money to the nonprofit's financial institution. It's the word "center" that's getting you—if you must think of it as a place, think of it as a magical place that attracts money. A payment depot, if you will.

What is a credit card acquirer?

A credit card acquirer is the one that catches the money, so to speak. Once the payment is made, the credit card acquirer is the one left holding the cash. They are bound to deposit the money into the nonprofit's bank account, minus any fees.

What is a payment gateway?

If a payment processor is a company that handles the behind-the-scenes work, a payment gateway is the entry point for online transactions, facilitating a smooth experience. It collects all the necessary customer data, ensures everything’s kosher, and then transfers donor and card information to the payment processor.

So, if you want to take advantage of the funds in your donors’ digital wallets, you’ll need a payment gateway to collect and encrypt their payment information and route it to the payment processor. The payment processor informs the bank that it's ok to hand over the cash. It’s all a beautiful symphony, really.

Wait, I thought they were the same thing…

Yep, a lot of these terms are often used synonymously. Always with obfuscation, finance world! But with good reason—it’s not unusual for a provider like Stripe to act as both the gateway and processor, for example. So now that you know the differences, you’ll know what to look for, and you won't be as confused when we're accidentally inconsistent with our terms. And one more thing… getting a Funraise account is the easiest way to have all of this and more. No need for the neon question mark above your head anymore!

Also, when you're looking at articles outside the nonprofit world, you can think of the nonprofit as the merchant, their Stripe or PayPal account as a merchant account, and their payment processor is a vendor. The donor is the customer, and the logistics of accepting their credit card payments is similar to the way third-party payment processors accept credit and debit card payments for their goods and services. Yes, there are many differences between the nonprofit and for profit worlds, but the logistics of accepting credit or debit card payments (depending on the payment provider) is remarkably similar.

One more... What’s a digital wallet?

A digital wallet, also known as an electronic wallet or e-wallet, is an online service or application that lets you pay for things online. Since it stores all your banking info, there’s no need to reach for your physical wallet. Nonprofit donors use their digital wallets to make donations, join membership programs, or buy tickets to an event. Examples of digital wallets include Apple Pay, Google Pay, or PayPal.

And here’s a fun fact: In 2021, more than 50% of global e-commerce payments were made using digital wallets (Statista). Payment processing services are leaning more digital, more mobile, and the transaction process and types of payment options are growing like whoa.

How do payment processors work?

While you can tour the US Mint to see exactly how your cash gets made, the same isn’t true for digital payment tools. If you’re feeling mighty suspicious of all this newfangled technology—and we get it, we relate to Abe Simpson, too—here’s a quick play-by-play: "How do payment processors work?"

1. A donor makes a payment on your website.

It can be a small gift or a large gift, a one-time donation or a recurring subscription, event tickets, or online merch. The point is: they’re sending you money.

2. The donor’s financial information enters the payment gateway.

Whee! Honestly, we thought this tour would be boring.

3. The payment gateway collects, verifies, and encrypts the information.

Just double-checking that your donor’s info hasn’t been stolen by robots. Once everything’s safe and secure, it can get processed.

4. The accepted donation moves on to the payment processor.

Acceptance is so sweet. Time to spend some quality time with the payment processor!

5. The payment processor starts the official transfer process.

It securely sends the card data from the check-out page to the donor’s card network (be it Visa, Mastercard, or something else).

6. The network says yay or nay.

The card network either authorizes or declines the payment depending on whether funds are available. Assuming the payment is authorized …

7. The bank sends you the funds.

Thank you!

8. You get the donation in your account.

Watch out for incoming donation funds! Now, to make big ol' impact with those gifts.

Example of a payment processor for nonprofits: the Funraise solution

Funraise Payments is the most excellent example of a payment service provider that we can think of; it's built to have all the features of the big payment processors, but customized for nonprofit payment processing, so you get the best of what Stripe offers on your donation form, embedded right on your website. There’s top-notch security and transparent pricing, and Funraise Payments supports all the popular payment methods. Plus (and this is a big bonus), donors have the option to cover the platform fee. About 90% of them do, which means an effective platform transaction fee of 0% for you.

Get all the details on Funraise Payments

Choosing a solution for your nonprofit

Now that you know everything you could ever want to know (and maybe some things you didn't) about payment processors, the time has come to choose which one’s right for you. Keep in mind that features, rules, and rates can vary for nonprofits—plus, you’ll need to get your board’s full buy-in before making any moves. With those caveats out of the way, let’s dig in.

But first, we want to emphasize this… you don’t need to choose a payment processor. By setting up your Funraise account, you automatically get access to Funraise Payments by Stripe—the gold standard for nonprofit payment processing.

Questions to ask when choosing a payment processor

As you survey the vast payment processor landscape, here are some things to ask yourself and any potential payment processing vendors. (And yes, you can ask us at Funraise all of these and more.)

  • Is there a start-up fee?
  • Is there an annual fee on top of the debit or credit card transaction fees?
  • Do they support international payments?
  • What security precautions do they take?
  • Do they have readily available, live customer support?
  • What’s the onboarding process like?
  • How long does it take for donations to get deposited in your account?
  • Are there additional features for nonprofits?
  • Is there a cancellation fee?

The different payment types/processors

With all of the above in mind, what’s the right processor for you? Here are a few top payment processors along with our expert opinions.

Our top choice: Funraise Payments (powered by Stripe)

Obvious. The power of Stripe, the innovation of Funraise, the passion of a nonprofiteer. A payment processor dream-come-true.

Even more 🤌 is the mobile checkout process, giving you the ability to use Funraise's app as a card reader for payments on the go.

Stripe

We love Stripe (and that’s why we chose it for Funraise Payments!). It sets the standard for payment processors, is secure, allows you to accept payments in a ton of currencies, integrates with pretty much everything, and has live customer support 24/7. The best part is that it's used with Funraise Payments, so you get all this and you can begin collecting donations day one. It’s that easy.

PayPal (and also Venmo)

If you want to go with what you—and everyone—knows, PayPal is the original payment processor. It’s popular for a reason: its merchant services are easy to use and works in nearly every country. But it tends to be more expensive than the alternatives and you can only reach customer support on the phone during limited hours. There’s also very little in the way of customization.

Block (formerly Square)

Block, which you probably still know as Square, is popular with brick-and-mortar businesses. Upside: it’s a snap to set up an account with a payment processor and get going. Downside: add-on services can really add up, and as you grow, you’ll might want more options (which Funraise Payments has in spades!)

Know your payment processor fees

As you can see, payment processing requires the involvement of many parties and systems, and like most things in life, it don’t come free. There are staff members to pay, networks to maintain, and bugs to troubleshoot. As a result, there are fees, and they fall into three categories. Note well, however, that these fees vary widely, so do your research.

  • Transaction fees (AKA payment processing fees). These are the fees associated with each individual payment. They’re usually a percentage of the amount plus a small flat fee. Per transaction fees are typically your largest payment processing expense, and they’re nonnegotiable, so pay close attention.
  • Flat fees (AKA scheduled fees). These are set monthly or annual fees associated with a payment processor. They’re all over the map; some processors change no flat fees (woohoo!) while some are pretty steep (boo!).
  • Incidental fees. If something goes awry, you may find yourself with incidental fees. Maybe it’s a chargeback fee or a fee associated with not having sufficient funds in your account. Either way, if you get them, you should prepare to haggle with all your might.

All about online payment security

No matter how affordable a payment processor may be, if it doesn’t keep your donors’ data safe and snug as a bug in a rug, it’s a no-go. But what should you look for when you’re considering processor security—and which security features give you the biggest bang for your buck? Never fear; Funraise is here [to demystify payment processing security features].

  • Tokenization. Worried about hackers, cyberattacks, and fraud–oh my(!)? Fear not, friend. Enter tokenization, a process by which card details, like names, numbers, and CVV codes, are replaced with randomly generated IDs known as “tokens.” Now, all your data is as safe as can be.
  • Encryption. Data encryption is a process that uses algorithms to make text unreadable. It’s similar to tokenization, but the method is different. So, you might wonder, which is better? The answer is a resounding “both!” A payment processor that uses both tokenization and encryption offers optimal protection.
  • PCI compliance. Payment card industry (PCI) data security standards are a set of guidelines that outline how companies can best keep customer data secure. You want your payment processor to be PCI-compliant and then some.

When it comes to payment processing, it’s a jungle out there. Thanks for letting us be your guide today!

Get the best payment processor in the galaxy, Funraise Payments!

Nonprofit payment processing key takeaways

  • Funraise Payments is powered by Stripe and is purpose-built for nonprofit donation processing. It offers the best of Stripe and Funraise’s security, innovation, and ease of use. All Funraise accounts have access to this super-powered payment processor. So, what are you waiting for?
  • With more than four in five Americans using digital payments, nonprofits need to work with payment processing companies to accept and process online payments securely and seamlessly. Payment processors also make accepting credit card payments safe and secure.
  • There are three main fee types associated with payment processors: transaction fees, flat fees, and incidental fees.
  • When you select payment processors, security is paramount. Look for a processor that is PCI-compliant and uses tokenization and encryption to protect donor information.
  • The right payment processor depends on your nonprofit’s size, technical knowledge, and needs.
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