Last editedSep 20223 min read
Payment processing for US nonprofit organizations has historically been focused on card payments due to their prevalence and convenience.
However, high transaction fees and high payment failure rates combined with easy access to more affordable and reliable bank payment methods, such as ACH, are changing the non-profit payment landscape.
Donations are a vital component of nonprofit fundraising. A reliable payment processing system ensures that the process runs smoothly and securely, inspiring donor trust and encouraging recurring payments.
ACH payment processing is often a good fit for nonprofit organizations, but how does ACH payment processing work exactly? Here’s what you need to know.
Why do nonprofits need a payment processor?
Before we delve into the details of how ACH payment processing works, let’s first look at why a payment processor is so important for nonprofits. Here are a few of the reasons why you need to be able to process payments:
Collecting membership fees
Selling tickets to events
There are multiple revenue streams for nonprofits, so it’s important to have a payment processing system that can handle everything from tickets to your fundraising gala to branded merchandise. Most nonprofits will also need a processing gateway that accepts both one-off donations as well as recurring payments.
What is ACH payment processing?
ACH stands for “automated clearing house,” which is the network used to connect thousands of banks throughout the United States. Through this network, bank account holders can electronically transfer funds from one account to another as direct deposits. Transactions are speedy and secure, requiring only a bank account number and routing number for processing.
Credit card processing for nonprofits Vs ACH
Credit card payments and well known for having relatively expensive transaction fees and high payment failure rates, which leads to the loss of donors and an increased burden of payment admin.
As a direct account-to-account transfer, which, unlike credit card payments, involves no intermediaries, ACH offers more transparent and affordable pricing.
Furthermore, cards are often cancelled when they are lost or expire, and this leads to high payment failure rates of between 10 - 15%. By contrast, ACH is a bank payment direct from bank accounts that do not get lost or expire.
To make the system more efficient, banks process ACH payments online in bulk batches which are processed two or three times per day. This means that ACH payment processing time can take between three to five business days to clear your account, making ACH unsuitable for organisations that require instant payments. However, this batched nature of ACH further lowers costs, with the savings passed on to customers.
How does ACH payment processing work?
When a donor wishes to send an ACH payment for the first time, they will need to start the process by filling out an authorization form. This collects the following information:
Bank account number
Bank routing number
Bank name and address
This authorization form should also include a space for the donor to decide how much they want to pay. It should also state whether the payment is a one-time donation or a recurring payment that will be taken from their account each month.
The donor’s bank enters the details and authorizing information and batches it with any other ACH payments being processed that day. The payment is then sent to the nonprofit’s bank, also called the receiving depository financial institution (RDFI) where the funds are deposited into the appropriate bank account once cleared. While the full ACH payment processing time normally takes between three and five days, same-day processing is available in some cases.
Benefits of ACH payment processing
Like any business, there are many different payment processing options for nonprofits. So, why should you process ACH payments online?
Setting up online ACH payments offers a host of benefits, primarily the ability to set up recurring payments for long-term donors. With recurring payments, your organization benefits from more predictable cash flow and improved revenue streams.
Here are additional advantages of using ACH payment processing for nonprofits:
1. Convenience: Compared to collecting cash and paper check payments and depositing these in person at the bank, accepting electronic ACH payments is far more convenient. Nonprofits often work with stretched resources, so anything that can save you time is a huge benefit. After your donors authorize a payment, it’s automatically deposited directly into your bank account. The process is also easier for donors, who retain full control of their payment schedule.
2. Admin automation: GoCardless integrates with over 200 different accounting software packages that allow merchants to automate payment collection and large chunks of financial admin.
3. Lower fees: Credit and debit cards are another convenient way to accept payments, but these come with the burden of higher transaction fees. Because ACH transactions are processed in bulk, and are direct transfers between banks, they are significantly cheaper than like-for-like credit card donations.
4. Secure payments: Cash and paper checks can be lost or stolen. Credit cards are also more susceptible to fraud than bank payments. Electronic banking ensures that all financial details are transmitted through the highly secure ACH network. Be sure to use secure ACH processing software and encrypted authorization forms to protect your donor’s details.
Of course, choosing a reliable payment processor is important when you’re looking at ACH payment processing for nonprofits. Compare fees, timings, and user-friendly features carefully to ensure that you find the best fit for both you and your donors.
Case Study: saving time and money on fees and admin
Using GoCardless has enabled Diaper Stork to reduce payment costs, with the company now paying 2% less per transaction than cards for every customer that chooses ACH debit.
As well as monetary savings, automating financial admin has further saved the business 2 - 3 hours a month in accounting time, allowing them to focus on improving the customer experience.
Learn more about how GoCardless can save you time and money on payment collection.