Every dollar lost to fees is a program dollar denied. This is the reality for every donation given to a charity. For example, when a donor pays $100 to a food bank, the charity receives $97.10. The $2.90 deficit is not an abstract cost but a direct implication that removes one meal from the program budget. In 2023, total charitable giving in the United States reached $557.16 billion, out of which nearly 12% was processed online. At this scale, even a blended pricing rate of 2.5% erases over $1.67 billion in annual charitable revenue before it even reaches the nonprofit organization. This money was donated for a cause, but never reached the program.
Processing fees for Nonprofits are charged by payment processors through a layered fee structure within a broader nonprofit payment infrastructure picture covering interchange fee, assessment fee, and a markup. Every fee is triggered independently and is usually a percentage of the amount being transferred. The interchange fee is set by the card network and retained by the issuing bank. The network fee is levied by the same network in exchange for allowing the payment to travel through their payment guardrails. And, the markup fee is retained by the acquiring bank.
For instance, a charity that absorbs a 2.9% + $0.30 fee on 10,000 donations with an average value of $50 will pay approximately $17,000 in processing costs annually. These funds could have been used to cover staff hours, supplies, or direct program activity.
This is especially very important for small nonprofits with annual revenues under $500,000. They will be disproportionately affected because they do not have sufficient volume to negotiate markup fees with their card service providers and thus have to accept standard interchange subscription tiers, which cost them more. To reduce the burden of interchange pricing, it is necessary to understand what drives the percentage of these costs.
First, we need to understand that interchange is not a processing fee. It is a mandatory transfer charged per transaction from the charity’s acquiring bank to the cardholder’s issuing bank. This interchange fee is set unilaterally by Visa and Mastercard on a biannual schedule. Knowing the floor that these card networks impose clarifies which part of the transaction fees can be negotiated to lower your costs and leverage the position and volume that your nonprofit processes in your favor.
Interchange fees are updated twice a year, and both Visa and Mastercard publish their respective rate schedules for merchants to refer to. Previously, the standard “charity” interchange rate for card-present Visa transactions was 1.35% + $0.05 compared to 1.51% + $0.10 for standard retail rates. This discount is meaningful, but only a handful of nonprofits can take advantage of it due to limited awareness. This discount is allowed to IRS-designated 501(c)(3) organizations that register their merchant category code (MCC) correctly.
Mastercard operates in parallel with Visa and offers a “Merit III” tier for qualifying nonprofit card-present transactions, with a rate of 1.43% plus $0.05. In contrast, card-not-present (CNP) nonprofit transactions incur a rate of 1.75% plus $0.20 under the “World Nonprofit” designation. This may seem like a good discount, but since most donations are made online, most of these transactions are NCP.
To avail these discounts, nonprofits must register under MCC 8398 (Charitable and Social Service Organisations). Most nonprofits register under generic MCCs such as 5999 (Miscellaneous Retail) and are charged standard interchange transaction rates. Understanding how merchant category codes (MCC) work and which category your organization fits into is crucial, or you may end up overpaying on your transaction fees.
Assessment fees are separate from interchange fees and are charged by the card network, which can add a further 0.13% to 0.15% per transaction for both Visa and Mastercard. This charge is applied regardless of the organization’s nonprofit status because these fees fund card network operations rather than bank operations. Another important point is the risk factor for every transaction. A CNP transaction is more prone to fraud and thus carries higher interchange rates than a card-present transaction.
It is necessary for a nonprofit to identify which fee structure saves them money to reduce processing costs. Three pricing models govern what a nonprofit pays to payment processing providers, and only one of them saves money. It is crucial for a nonprofit to understand these pricing structures to avoid overpaying on every transaction. The major pricing structures are flat-rate, interchange plus, and blended nonprofit pricing. Different processors charge different rates on every transaction.
On every successful card transaction, Stripe charges verified nonprofits 2.2% plus $0.30 through its standard nonprofit discount. Stripe offers this reduction by absorbing a lower markup rate, not from interchange deductions.
PayPal Giving Fund routes donations to U.S. nonprofits at 0% processing fees by absorbing all costs internally, but there is a catch. In exchange for this discount, PayPal disburses funds according to its own schedule and withholds donor data, which, in itself, is an expensive trade-off. Square is economically disadvantageous for nonprofits to choose as a payment processor, because it offers no processing fee discount whatsoever.
Interchange-plus pricing is a pricing model in which a processor charges an actual interchange fee plus a separate markup fee. It is the most transparent pricing model available in the market, as it explicitly discloses the interchange rate and markup rate for each card transaction. For nonprofits registered under MCC 8398, it is usually the best choice due to its cost-saving potential through negotiations on markup rates across various cards, rather than paying a blended, inflated rate for a mix of cards.
There are other platforms that operate on a SaaS subscription model, plus a 1-1.5% transaction fee on every transaction. For nonprofits operating at more than $500,000 annually, this model actually saves more money than interchange-plus pricing.
The donor-covered fee model, also known as the recovery model, allows donors to absorb processing costs at checkout. This leaves the entire gift intended for the charity untouched and directed entirely to the cause. When the donor is asked to cover the fee at checkout, it triggers IRS rules on receipts and compliance that must be followed.
The fee recovery model requires an accurate calculation of what the donor must be charged, so that money does not eventually leak in residual processing. Most platforms default to the donor covering the processing fees, and this option can be unchecked at checkout. However, donors mostly absorb the processing fees when they are included in the donation amount by default.
When prompting the donor to cover the processing fees, the framing matters greatly. Asking the donor to cover the fee so that “the donated amount goes towards the cause” is much more effective than asking the donor to “add a tip to the donation “. The framing changes how the donor perceives the extra cost, and aligning the coverage with the mission is proven to be more effective.
The donor can deduct the processing fees in their tax records because it does not provide any material benefit to the donor. Under IRS Revenue Ruling, the processing fee qualifies as a deductible contribution, but it requires the nonprofit to provide a written tax receipt that reflects the gross amount charged to the card, i.e, the donation received plus the fee covered. Recovering costs is, therefore, a revenue protection mechanism that requires receipt accuracy. This accuracy feeds directly into donor trust, which is the primary variable in determining whether a nonprofit can successfully pitch fee coverage in the first place.
Switching to a processor that reduces net operating costs is a wise decision, but understanding the factors that affect processing fees is crucial when evaluating and comparing processors.
The first and foremost point to consider is the MCC under which the processor is willing to register your organization. As a nonprofit, having a written acknowledgment that your organization will be registered under MCC 8398 is important. You can request a copy of your merchant boarding documentation to confirm the same. Registering under the wrong MCC category silently drains money.
After correctly classifying the organization, you must choose a pricing model that saves money. You can outright reject flat-rate pricing models. And if you are a small nonprofit that nets less than $500,000 annually, your best option is the interchange-plus pricing model. With interchange-plus pricing, you can clearly separate the interchange and markup costs for different cards, helping you avoid overpaying inflated blended rates.
Chargeback policies must be reviewed before choosing a processor. A processor that penalizes based on standard retail chargeback thresholds is not an ideal choice, because the chargeback variance for charities differs from that of retail. For recurring donations, ACH charging and eCheck availability must also be considered. Bank-to-bank transfers are cheaper, and recurring ACH donations reduce transaction costs. If the processor only offers locking-in long-term contracts and imposes penalties for early termination, you should avoid them. More preference must be given to processors that offer monthly renewals.
Nonprofits that treat credit card fees as a fixed cost of fundraising consistently underperform those that build fee management into their donor infrastructure. Managing your fees does not require huge organizational changes. Small steps, such as registering under the correct MCC 8398 classification, which costs nothing, significantly affect the processing fees charged on every transaction.
The effect of fee optimization compounds over the long term. A charity reducing its effective rate from 2.9% to 1.8% on $1 million in annual online donations recovers nearly $11,000. This is equivalent to roughly 200 additional program hours at the average nonprofit labor costs.
The nonprofits that benefit the most from these strategies are those that treat donor-covered fee prompts, interchange classification, and processor selection as one integrated system. Optimizing prompts to align with the mission, negotiating markup fees on interchange pricing models, and selecting the right processor save dollars that could be directed towards the mission.
Payment processing fees are deductible as ordinary and necessary business expenses under IRC Section 162, applicable to 501(c)(3) organizations.
The donor-covered fee model is legal, but it requires strict compliance with the IRS’s receipt rules. The written receipt must acknowledge the gross amount paid by the donor, not the amount received by the charity.
Discounted nonprofit interchange rates only apply if your payment processor registers your merchant account under MCC 8398.
Interchange fees are paid to the cardholder bank and are set by card network providers such as Visa and Mastercard. Processor’s fees are a separate markup paid to the company that handles the online transaction, such as PayPal or Stripe.
Yes, ACH transfers bypass credit card networks and charge a flat fee of $0.25-$0.75 per transaction. This is the cheapest method for accepting recurring donations, but it requires donors to enter their bank information, which reduces adoption rates.
