Finding the Payoff in Nonprofits

 

It’s not enough to sell payments services to churches and charitable organizations. They want assurances their unique needs will be met.

It might seem counterintuitive, but merchant-services profits are to be had serving nonprofit organizations.

But it’s not as simple as knocking on doors or harvesting online leads. It takes more than the typical approach of a commercial merchant-services business and the ability to sign up merchants.

It requires a commitment to the cause of serving nonprofit organizations, which need multiple payments methods, some of which are not frequently used by most for-profit merchants.

Regardless of the size of the merchant-services company, one thing is constant: The nonprofit organization must believe that its independent sales organization or acquirer has its best interest in mind.

The rewards in this segment can be considerable. ISOs and acquirers catering to nonprofit organizations may have to put in extra work to attract and retain merchants, but the payoff could be a portfolio with lower attrition that accepts multiple types of payment methods.

Unique Needs

“It starts with the alignment of mission,” Kevin Lee, chief executive of Vanco Payment Solutions, an Atlanta-based ISO specializing in serving nonprofit organizations, such as churches and cause-related organizations.

In January, 17-year-old Vanco merged with Veracity Payment Solutions, which started in 2007. The merged entity has more than 30,000 clients, including approximately 15,000 churches and nonprofit organizations. Vanco processed more than $13 billion in transactions in 2014.

Unlike the case with for-profit merchants, for nonprofits the payment is not an enabler of commerce, it’s the product, Lee says. Donations are immediate telltales of an organization’s message. “Was that fundraising message impactful?” Lee says. “Was the sermon impactful? Is the mission I have in the community really hitting home with people?”

Executives at Dharma Merchant Services, a San Francisco-based ISO that was founded in 2007 specifically to cater to nonprofit organizations, such as those advocating sustainability and socially responsible practices, concur with Lee.

“We know that our organizations are committed to doing the right things in the world,” says Jeff Marcous, co-founder and “chief evolutionary officer.” Dharma has approximately 3,500 merchants. “What we see as the driving force for most of our business is the reputation we have [for] having the merchant’s best interest in mind,” Marcous says.

Dharma makes annual donations to charitable organizations based on a percentage of the net revenue from a merchant.

Nonprofit organizations differ as much as for-profit businesses. Some will want different types of payment-acceptance methods. Others may require special support. One may need a payment module to integrate with its business-management software, or require mobile card readers a couple times a year for special events.

“Almost all nonprofits are doing online sales,” Marcous says. For the first five years of Dharma’s run, about 80% of its merchants accepted only card-not-present transactions, but since January 2014 that has shifted to a 50/50 mix, he says.

Vanco’s Lee says many have unique needs. A church has a need to accept face-to-face payments, but also may need a kiosk or tablet to take in offerings.

“They also need recurring payments,” Lee says. “Then they need a mobile app or Web application to do that. That same church owns a school. Now people want to give money to the church to go to the school. They may need an invoice for that. They may need electronic bill presentment.”

And, as with almost every other merchant, pricing is a discussion point for nonprofit organizations. As with for-profit merchants, the discount rate, which is interchange plus any fees required by the acquirer and processor, is set by the merchant-services provider.

All of Dharma’s merchants are priced on such “interchange cost plus” plans. They pay the appropriate interchange rate for the transaction type and a fee, compared with having their transactions bundled into one of three categories based on risk.

Relationships Matter

Just as the payments sophistication of for-profit merchants varies, so too with nonprofit and charitable organizations, says Lee. “The large nonprofits are very sophisticated buyers,” he says. “They’re accepting billions of dollars a year in donations.”

When pricing those merchant contracts, Vanco is very competitive, Lee says. Larger nonprofit organizations may use a request for information to get more information about vendors. “They will have relationships they’ve built in the market and narrow it down to one or two,” Lee says.

The opportunity to sign up nonprofit organizations with less price pressure increases with smaller entities, Lee says. “As you go down market, it becomes very fragmented,” he says. “They tend to buy [on] relationship more than price.”

Lee adds that the major card brands often can approve so-called emerging-market rates, which might be less expensive than other interchange categories. But, to get these rates, the organization will need to have some sizable payment volume, along with data that demonstrates that their electronic-giving programs are reducing the amount of funds received as checks and cash, he says.

For the ISO or acquirer, reliance solely on nonprofit organizations may not be the best strategy. Marcous says the typical revenue per merchant with a large nonprofit portfolio isn’t as great as with a portfolio of mostly for-profit merchants. That can be counterbalanced with e-commerce merchants, which pay higher card-not-present rates, for example.

“You could make the case a processor could completely live on the processing from nonprofits alone,” Marcous says, “but I think it’s best to diversify the merchant types in a portfolio.”

Merchant services for nonprofit organizations also differ in other ways. The boarding process, which refers to enrolling the merchant for the processor’s payment platform, may be different than with other merchants.

At Dharma, nonprofits have to supply the typical average ticket size and the monthly volumes, Marcous says. The reason for that is that many nonprofits experience seasonal spikes, especially at year’s end. The requested data helps underwriters have a clear picture of the organization’s payment pattern and avoids the need to hold up funds, he says.

And Dharma is judicious in its use of reserve accounts. “If we board a brand-new nonprofit without a track record and it’s holding some sort of one-time event, and doing advance-ticket sales, we may hold funds,” Marcous says. “But we really haven’t held an ongoing reserve on merchants.”

The sales pitch, too, may differ. While the larger nonprofit organizations have a lot of experience dealing with payments companies, many smaller ones do not. That can shape the sales pitch.

Belief in the Merchant

At both Vanco and Dharma, inbound calls from organizations dominate. Dharma has no outside salespeople because the volume of inbound calls generates more than enough business, Marcous says. Like Vanco, Dharma has a steady stream of calls and referrals to follow up on.

Many nonprofits are part of larger regional and national associations, which may strike payment processing referral deals, and which the smaller organizations may look to, Lee says.

Lee says the sales pitch must tie into a relationship between the organization and the payments company, meaning the organization must believe the provider truly has its interests in mind.

At Dharma, nonprofit organizations, assuming they process at least $10,000 per month in credit and debit card transactions, generally can board the same day, once Marcous and his staff have checked the organization’s financials on GuideStar.com, a Web site that provides detailed financial information on nonprofit organizations.

Dharma also does not require a personal guarantee on its nonprofit merchant contracts. That staple of merchant-services contracts requires an individual to stipulate the merchant’s performance will be reflected on the individual. But a nonprofit executive does not need to agree to a personal guarantee with Dharma because the individual does not have a personal investment in the organization, Marcous says.

Nonprofits still must comply with the Patriot Act, which requires ISOs and acquirers to obtain Social Security numbers of executives on the contracts so they can be checked against a federal database. “We’ve never had an issue with that,” Marcous says.

The Payoff

All of this special attention to nonprofit organizations has a payoff not only in revenue, but in attrition. Marcous says his portfolio is stable, and has a low attrition rate. Dharma issues a monthly newsletter, and Marcous sits on the boards of four nonprofit organizations.

“If it does happen that someone approaches one of our nonprofit merchants with the guise of better pricing—because we foster communication—they’ll come back [to us] with the competitor’s quote,” Marcous says.

Similarly, Vanco’s nonprofit and charitable portfolio has low attrition, Lee says. “They’re very loyal.” The secret is understanding the organization and how their funding cycles work, he says.

“You understand the importance of an event that occurs on a Saturday, and maybe you staff appropriately,” Lee says, with customer-service representatives putting in a few hours while the event happens.

Keeping the nonprofit organization satisfied also means understanding that a church may have a steady flow of tithing, but see spikes around Easter and Christmas. While the church may use a Web site so its members can schedule recurring contributions, guests will want a more expedient way to donate, and that might require a tablet or kiosk to accept payments, Lee says.

No Dabbling

It takes work, but serving nonprofit organizations can be profitable. “The donation is the ultimate mark to help them understand if they’re hitting in the market or not,” Lee says.

After that it comes down to two components, says Lee. One is that nonprofits want assurances of the payments company’s commitment to them. The other is they want the payments experience to be as easy as possible.

“If you focus on the space and you can create specialized solutions around them and create scale, it’s a very attractive space,” Lee says.

But dabbling in it won’t suffice, he says. “Their needs are very specific.”