ACH donation processing guide for nonprofits

From accepting online donations to selling event tickets and branded merchandise through your website, the ability to facilitate digital payments effectively is absolutely essential for your nonprofit organization. To do this effectively, of course, takes more than just accepting payments.

An important factor for a positive payment experience is the ability to support major payment types, namely credit card processing, international transfers, and debit or ACH processing.

This guide breaks down the essentials of ACH payments and processing so that nonprofits can make the most of this powerful payment type. Topics include:

• What is an ACH payment?
• How does ACH payment processing work?
• Benefits and drawbacks of ACH payments

While most nonprofits support simple credit card transactions, too many underutilize or entirely miss out on the capabilities of ACH payments. This convenient, secure and versatile payment method can strengthen your fundraising efforts and open up the gates to a smoother, more accessible payment experience. Let’s begin by exploring the basics of what ACH payments entail.

What is an ACH payment?

ACH payments are direct transfers from an individual’s bank account into a target bank account. For example, an individual donor might transfer funds from their bank account into a target bank account (i.e., your organization's account) without the in-between step of a credit or debit card.

ACH payments, also known as direct debit payments, circumvent the need to process payments through a credit card network or other payment processing networks. Instead, they offer a direct bank-to-bank payment process through the Automated Clearing House.

What does ACH stand for?

ACH stands for “Automated Clearing House.” Run by the National Automated Clearing House Association (NACHA), this electronic payment network is used to “batch” and facilitate one-time and recurring donations, automatic payroll transfers, vendor payments and other direct payments and deposits.

Types of ACH payments

There are two main forms of ACH payment processing your nonprofit organization should be aware of:

Direct deposits
Direct deposits are payments made from a paying account into a pay recipient account, most of the time from a corporation or government entity to an individual. For your nonprofit, this might include your employee payroll system or the ongoing payments you make to your vendors or consultants. On the flip side, you may receive direct deposits through benefits from the government.

Direct payments
Direct payments are payment requests made to transfer funds out of a bank account. For example, this includes automatic utility payments your organization pays. Additionally, this also includes donations that are made to your nonprofit.

How does ACH payment processing work?

Here’s an example of how this process works. Let’s say there is a donor who submits an ACH direct debit donation to your nonprofit; these are the steps:

1. The donor enters their bank details – namely their routing number – into your donation form.
2. The data is captured by your payment processor, which sends this information to your nonprofit organization’s bank.
3. Your bank passes the ACH request information to its ACH operator.
4. Your bank’s ACH operator sends the information to the donor’s bank, which then debits the donor’s account.
5. The transaction is officially evaluated and validated, and your bank account is credited with the payment amount.

Countless transactions of this kind occur every day through the Automated Clearing House, facilitated by donor generosity, banks and payment processors.

ACH payment processing: Terms to know

ABA routing number
The American Bankers Association (ABA) routing number is the 9-digit number on the bottom of checks; this number identifies which bank the check is from.

ACH payments
Also known as direct debit payments, ACH payments are a bank-to-bank payment process managed by the Automated Clearing House operating on an electronic payment network.

Authorization code
An authorization code is the response code from the issuing bank returned to the nonprofit at the time of authorization.

Authorization fee
This is also known as a transaction fee. It is the amount that is charged to a merchant account each time the payment processor communicates with the authorizing network.

Merchant account
This is a type of enterprising bank account for businesses and other organizations that allows your nonprofit to facilitate, process, and accept different forms of electronic payments. If you’re already accepting credit card donations, your merchant services provider may be able to help with direct debit donations as well.

PCI compliance
The Payment Card Industry Data Security Standard is the technical and operational standards businesses must follow when processing payments and cardholder data. 

Benefits and drawbacks of ACH payments

ACH payment processing has both potential advantages and disadvantages for your organization. Consider these factors as you weigh the pros and cons of investing in an ACH-compatible payment processor:

Benefits

Increasing popularity
On average, the Automated Clearing House processes over 25 billion dollars in payments, deposits, and transfers, a significant amount of which includes the direct debit payments donors use to support nonprofit missions they care about. This amount is only expected to rise, with more and more people (like your supporters) making use of this payment method. By offering ACH payment options to your donors, you can make the most of its increasing popularity.

Lower transaction fees
ACH direct debit payments only require a flat fee for each transaction. By contrast, credit card payments typically charge both a percentage fee and a flat fee for each transaction. This can mean spending hundreds or even thousands of additional dollars just to accept donors’ gifts. Additionally, because donors change credit cards more often than banks, ACH payments allow your nonprofit to avoid bounced payments and more quickly process donations, online purchases, membership fees and event tickets.

Recurring donations
With ACH payment processing, donors can easily set up recurring donations that are directly debited from their bank accounts. Allowing donors to set up recurring donations automatically boosts your donor retention rates. As long as a donor doesn’t cancel the recurring debit, your nonprofit will retain that donor.

Security
Many people might be hesitant to share their bank account number online, but the process is actually quite secure. ACH payment processing uses encryption to essentially jumble the bank account numbers, keeping the info safe from hackers. Additionally, your organization can fortify security even further by investing in PCI-compliant payment tools. This means that the software has passed the most rigorous security standards set forth by credit card companies.

Accessibility to donors without credit cards
Not every single donor has a credit card. While some of these donors can simply donate via check, offering them an ACH payment processing option allows them to give easily online.

Drawbacks

Donor hesitancy
Even though many donors will give out their credit card numbers online to make purchases and donations, many are wary about using their bank account number to give online. What donors don’t know is that ACH payment processing is just as secure if not more secure than credit card payment processing. This is because the Automated Clearing House is a heavily regulated and controlled system and, should any fraud take place, users are protected under federal law.

Intimidating process
Most people are familiar with entering their credit card numbers on an online form. However, few know their bank account numbers off the top of their heads, and even fewer remember their bank’s routing number. To address this, you can ease donors into the process of using ACH direct debit by showing them where to easily find this information. Include an image of a sample check on your donation form that shows donors where their bank account and routing numbers are. Alternatively, most mobile banking apps will list users’ routing numbers when they’ve securely logged on.

Lack of real-time transparency
It can take anywhere between 3 and 45 days to return or decline an ACH transaction if the donor inputs the incorrect information or if there are insufficient funds in the account. This creates a lag in transparency for nonprofits. Unfortunately, there isn’t really a solution for this particular problem. It’s best for nonprofits to treat all ACH donations as “pending” until the funds are deposited into the account.

What nonprofits should look for in a payment processor

From its security and simplicity to its wider accessibility than typical credit card payments, ACH payment processing is a powerful tool that can empower your nonprofit to create a more positive payment experience and increase its incoming revenue. However, in order to facilitate ACH payments in the first place, you’ll need a robust payment processing system that supports ACH transactions.

With an ACH-enabled payment processor, nonprofits can streamline all their payments together and individually within a single merchant account. Efficiency, accuracy and security should be guiding principles in your decision, and compatibility with your existing systems (such as Salesforce) can be a major benefit. Here are a few other things to look for in your payment processor:

• Level 1 PCI security compliance
• Tokenization, encryption and other anti-fraud tools
• Complete integration capabilities

With a comprehensive payment processing solution, your nonprofit organization will be equipped with all of the features you need to create a safe, secure and streamlined donation experience.