Percentage based billing is just about the worst thing ever.

In recent years, percentage-based billing has become more and more common for vendors in the non-profit space, particularly to charge for the portions of their service that involve credit card / financial transactions. So instead of charging you a monthly / annual fee, you pay a certain % of each transaction you process using their service. 

Now it’s beyond question that this is a fantastic and profitable business model. Let’s look at Visa Inc. who contrary to popular belief, don’t actually receive any money when you have an insane week where you mix up the kids and drop your little figure skater off at football practice, the PTA conference ends in blows, and the wheels on your car literally fall off on the way home from work and  you forget to pay off your credit card in time. Sure, you still get hit with a penalty and an interest rate flirting with 20% or higher, but is that where Visa makes its money? No, those interest charges go entirely to your bank. Almost all of Visa’s profit (typically more than 90%) comes from the small percentage they charge their merchants on every single transaction.

Since its initial IPO in 2008, Visa’s stock has risen over 500%, their revenue in 2017 was over 19 Billion (yes, with a B) and in a recent article on Forbes, their revenue was forecasted to double by 2021. All those transaction fees don’t look so small when you put it like that. 

Getting back to how this impacts non-profits, this billing practice is most problematic when it’s used to price accepting donations.. If you’re running a very low volume non-profit that only sees a limited number of donations a year, then at the end of the day it doesn’t matter too much. But, as you grow and the number of transactions you process increases, those costs quickly spiral out of control.

Typically, when accepting credit cards online, you should be paying somewhere around 2% of each charge and certainly not anything over 3%, or close to it! At Donor Engine for example, we charge a fixed rate of 2.1% in the US and 2.2% in Canada. 

There is nothing that can be done to avoid that paying at least some charge, this is the business model that the entire system of credit cards is based on. But that price has to be kept as small as possible, as even one or two percentage points massively inflate your costs. Let’s say you’re being charged 3% or 4% instead, and look at what that does to your costs.

 Amount Charged  2%* (Standard Cut)  3% (1% extra)  4% (2% extra)
 $100,000   $2000   $3000   $4000
 $250,000   $5000   $7500   $10,000
 $500,000   $10,000   $15,000   $20,000
 $1,000,000   $20,000   $30,000   $40,000
You’re reading that right… for every percentage point over 2%, you’re paying about $10,000 extra in fees per $1,000,000 processed than you should!

It gets worse. The structure essentially works like this:

Visa and Mastercard have what’s called an "Interchange Rate”, this is the base % charge they issue on every transaction, that is where their revenue comes from.

Then the companies that provide the actual merchant accounts that you use add a % on top of that charge, and that is where their profit comes in.

Finally, at the bottom of the chain you’ll have companies like Donor Engine who refer their clients to the merchant account companies, and those companies will often share a portion of their profits with the referring company.

So, here’s where it gets insidious. That "Interchange Rate” I mentioned above, it’s not a single number, it’s actually a huge table with many,  many different  rates based on the sales scenario (IE, what type of organization is making the charge, what are they selling etc.). It’s quite complex, but there is only one relevant bit of information for us here. Charitable Donations are what’s considered an "Emerging Market” by both Visa and Mastercard on the "Interchange Rate” list of charges. That’s not good news in this case.
Practically speaking, this means that charitable donations have some of the lowest base rates of any type of credit card transaction. That sounds good, but unfortunately it doesn’t turn out like you’d think it would. When you’re paying a high percentage rate to your end vendor, not only are you potentially losing a ton of extra cash in obfuscated fees, but someone upstream (usually the end vendor and the merchant provider) are making more money on the backend because they are getting a discount from Visa and Mastercard and instead of passing on the discount to you,  they are charging you more!
This is a complicated topic, and often companies aren’t helpful when it comes to understanding this. I’ve even run into vendors that do their best to hide the actual merchant discount rate (that’s the industry term for that % you are charged) so their clients don’t know what they are paying exactly. Often this is done to obscure a particularly egregious charge which is bad enough, but the worst offenders will actually tack that high percentage charge ON TOP of a monthly or annual service fee! At that point, we’re talking about brazen overcharging, all at the expense of non-profits and the causes they support. 

So, if you’ve read this and it upsets you as much as it upsets me, what are the next practical steps you can take to improve the climate both for your organization and others? It’s quite simple.

Not all vendors make this part of their practice. When are making a purchasing decision, not only should you actively avoid vendors that charge high %  rates on credit card transactions, but you should also tell those vendors exactly why you have eliminated them from consideration. 

Generally, the only way to turn the ship of business is to hit them squarely in the profit center.  If the vendors that engage in this practice hear that they’ve been removed from consideration due to this practice often enough they will be forced to change, and that’s good for everyone in the non-profit space.

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Strategy,Payment Processing Apr 2, 2019, 12:00 AM

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