This guest post was authored by Nick Bencivenga, senior vice president at Dharma Merchant Services.
Accepting credit cards can often be a confusing process. With so many different providers, services, and terminology, it's easy to become overwhelmed.
This is the first blog post in a two-part series designed to provide nonprofits with a general overview of the credit card processing industry, otherwise known as merchant services.
On the surface, accepting credit card processing may seem simple, but it's important to pay attention to the details. To get started, let's take a look at the different entities that are involved in processing a credit card transaction.
First, there is the acquiring bank, also referred to as a merchant service provider (MSP). The MSP's role is to physically process the credit card transaction, and manage all risk (fraud, unexpected losses, and disputed transactions) associated with the transaction. The MSP is responsible for funding the merchant's bank accounts, handling customer service for the merchant, and dealing with fraud and disputes.
Secondly, there is the card-issuing bank. The card-issuing bank represents the customer's bank, and is the bank who physically issued the credit card to the donor who's giving money to your nonprofit. Common card-issuing banks are large financial institutions such as Bank of America and Wells Fargo, along with smaller regional banks and credit unions.
The final entities are the credit card networks, such as Visa, MasterCard, and Discover. They are responsible for setting the rates at which these transactions process.
To get a better idea of how the process works, here is a sample flow for a transaction:
For every credit or debit card that exists, there is a preset rate that the MSP pays to the card-issuing bank. This rate is known as the interchange rate, and is set by Visa, MasterCard, and Discover Network. There are publicly available tables of interchange rates that are updated twice a year, with minor adjustments (you can click to see the tables for Visa and MasterCard).
The interchange rate will always have two components: a percentage fee of the volume of the sale, and a per transaction fee.
Typically, the interchange rate will be written like this: 2.00 percent + $0.10
A sample $100 donation would have ($100 x 2.00 percent) + ($0.10) = $2.10 in interchange fees.
There are literally hundreds of different interchange rates, because
there are many hundreds of different card types and purchasing
scenarios. Typically, cards with more "perks" or "rewards" will have
higher associated interchange rates. This is due to the fact that the
card-issuing bank has additional costs to recoup, such as paying for
rewards, points, or airline miles.
Cards that are processed without a
signature or address verification may also be subject to higher
interchange rates. These interchange rates apply to all MSPs, from the largest providers to the smallest.
way to think about interchange rates is to consider them as "buy rates"
for a transaction. They're the base rate for any particular
credit or debit transaction.
In addition to the interchange fees that the MSP must pay to the issuing bank, there are dues and assessments that are charged by Visa, MasterCard, and Discover Network.
These fees are assessed based on the amount of volume your nonprofit processes per month, whether or not your donors physically present the card to you, the types of security precautions you take, possible international surcharges, and other factors. Since many of these fees depend on the circumstance of each transaction, they're impossible to predict with 100 percent accuracy.
However, the basic fees that the card associations charge are roughly 0.11 percent of volume, and $0.02 per transaction. Just like the rates that MSPs must pay to card-issuing banks, these fees are paid by all MSPs. It's what allows smaller MSPs to compete with the larger banks.
In my second blog post, I'll be walking you through the basics of interchange-plus pricing, the model that Dharma Merchant Services uses to price merchant accounts.
The Dharma Merchant Services donation program at TechSoup
provides special discounted rates for payment processing services to
nonprofits, charities, and public libraries throughout the United
States. You can use Dharma's services to accept and process credit and debit card transactions in person or over the Internet.
Allyson Bliss, Senior Program Manager, TechSoup
This work is published under a Creative Commons Attribution-NonCommercial-NoDerivs 4.0 International License.
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