Payment Processing Basics

Credit cards have been around for a relatively long time, so you would think that payment processing wouldn't be that complicated. You would be wrong.

Processing credit card payments is far from the easiest thing to do precisely because the technology has been around for a while. There are many different ways to accept payments, all of which might require different types of hardware, software, and relationships. It's not realistic to shell out money for every single piece of technology out there, so the burning question out there is which are the best methods?

According to Laura S. Quinn, founder and executive director of Idealware, weighing your options requires a basic understanding of how credit card processing works. Unfortunately, it's not as simple as the information getting sent to you once the user swipes their card; it's a multi-step process that often involves a number of different vendors and entities.

Here are the three basic steps:

• Collect and enter credit card information. To process any payment, you'll obviously need to collect the credit card information from the person making the payment and transfer it -- whether electronically or manually -- to a service that can actually process the payment. This can involve anything from writing down the card information and mailing it to your bank, to typing it into an online system, to swiping the card through a specific kind of hardware.
•  Authorize and commit the charge. Once the payment information has been entered, it is transferred electronically to a payment processor, who checks to see that the credit card account exists and has enough money to cover the charge -- a process called "authorizing" -- and then actually charges the card.
• Deposit money to bank account. Once the card has been charged, you get to a critical step: actually receiving the money. The payment processor always deposits the money in a special kind of bank account called a merchant account. For most of the methods discussed in this article, you'll need to open your own merchant account, either through your own bank or one recommended by your payment processor.  

Now that you understand the basics of payment processing, you can start to figure out which methods work best for your nonprofit.