Mythbusting in the Charitable Landscape – Transaction Fees and Related Stuff

August 7, 2014 Benevity, Inc

Everyone talks about the transformative power of social enterprise – and they should. There is much to do, a huge appetite among the general and corporate populace to do it, and many new enabling technologies to help. 

What doesn’t attract as much transparency and play are some of the underlying challenges negatively impacting the efficacy of social investment – challenges that are external to the real-world problems people are hard at work trying to solve. We’re talking about the unglamorous but very necessary administrative side of the charitable world – things like donation processing, tax receipting and related matters. 

It’s a topic that’s more important than many think. It may not be popular to say it out loud, but charities and other NPO’s devote too much of their time and resources to out-dated, inefficient administrative practices (and it’s not all their fault!). There are alternatives – but prevailing myths and misconceptions tend to reinforce the status quo. We think it will be useful to burrow into a few of these rabbit holes and see if we can help.

The Landscape Problem in a Nutshell

Someone sent me a blog post a while back written by the CEO of a company in the employee giving space. The gist of the piece derived from a suggestion that his onsite visit and cash donation to a charity was a vastly more efficient approach than if he had donated the same amount online. The basic thesis was that online donation platforms – such as Network for Good, FirstGiving, Benevity and others – that charge a donation processing fee of around 5% were hurting not-for-profit ‘profits’.

We’ll not openly question the motives of the presentation (we’ll leave that for you), but we will have to ardently suggest that the thesis, analysis and prevailing thinking evident in the post is not only incorrect, it is precisely why certain aspects of the charitable and employee giving landscape are in the relative mess that they are.

Some Key Facts

Before we bust any myths, let’s start with three salient facts:

1. Of the $340 Billion that is donated in North America to charities annually, less than 7% is done online.
If that isn’t enough, many of the online platforms are still distributing donation funds by check, so even the online piece is not fully automated. You don’t have to be a finance guru to conclude that a staggering amount of manual processing is being done by the 1.3 million charities in the US and Canada and the vendors that service them.

2. Despite being two of the most technologically sophisticated countries in the world, the US and Canada are also the two most check-centric. 
This is a tragic disconnect. Checks as payment are cheaper to process than cash, but not by much. Both cost charities much more to receive than electronic funds.

3. Processing donation transactions and issuing tax receipts are neither strategic nor mission-oriented functions for any charity or NPO. 
The charities obviously need the fundraising proceeds, but the only strategic part of that exercise beyond the money is the donor information and what they do with it.

The upshot is that there is literally billions of dollars being chewed up annually in manual administration that is a commoditized and easily outsourced function. It’s analogous to a company building its own payroll system; yes, employees need to be paid, but who would ever do it themselves given the ADPs and Workdays of the world?

Landscape Issues Are Not Sexy

Admittedly (and unfortunately), not everyone cares about these issues. They are not nearly as obviously impactful as keeping at-risk homeless off the streets, or addressing poverty, clean water or cancer, or any other of the plethora of social issues that NPO’s, social enterprises and philanthropists are seeking to resolve. They don’t make good ad copy and the CEO of your company won’t get on TV for sponsoring them.

At the same time, unlike credit card processing where there are only a handful of large platforms, in the world of donations there are literally tens of thousands (maybe even hundreds of thousands) of organizations – non-profit and for-profit alike – that distribute donation funds to charities, mostly by check, with tax receipts in the mail and people (rather than technology) doing the lifting.

So not necessarily sexy, but it’s billions of wasted dollars…

Even if it was sexy, most donors, charities and even some corporate giving professionals don’t think that much about it. “Why is there a transaction fee? I can just send a check to the charity and then it will be free…”. This is precisely the type of well-intentioned but misguided thinking that has created this situation.

Even more challenging is the prevailing approach to charity distributions in the workplace giving area, where legacy vendors have been charging companies a ‘check fee’, compounding this very problem. There are too many vendors, mostly all small, and most without the client base, courage and conviction to swim upstream on some of these status quo issues. Benevity is different in all of these respects.

"We're a small charity, we're not allowed to get paid electronically" or "it won't make that big a difference to us as it's only a few checks". Does anyone think that it's okay to litter just a little bit, or do we recognize that it is the cumulative impact that threatens?

One great and heartening thing that happens to us regularly is that when we explain to a donor or charity some of these details, they are immediately supportive. Unfortunately, it’s impossible to do one at a time and the lack of transparency on the true costs of charitable giving and the “overhead myth” is a challenge that is insidious and endemic to the industry (more on the latter in a subsequent post).

The Way Forward

We need to reduce the fragmentation that exists in the space, as well as the prevalence of manual processing. In the world of automated transaction processing, scale is essential. Does anyone remember how much it used to cost merchants for credit card processing? It was originally double digits. With scale and automation, it has dropped to around 2-3%. Donation processing should be no different…

There should only be a dozen or so platforms that do this work, not thousands. They need to be large, automated, technologically sophisticated, and they need to generate enough revenue to enable proper investment in the evolution of their products and services to the benefit of the entire ecosystem. They need to be processing billions of dollars annually, accurately and from more than just workplace giving programs, and the companies, donors and charities they serve should rave about what they do. If they do so, they will be able to drive efficiencies and reduce transaction fees, as with any other scalable processing platform. To do anything else is perpetuating a race to the bottom in a sector that badly needs to improve.

The charities that are the intended beneficiaries of these platforms need to get on board as well; they need to be strongly encouraged to receive distributions electronically. It’s not okay to maintain a status quo that is costing billions unnecessarily, no matter how big or small the charity. That may suit the legacy vendors and participants because it avoids them having to innovate or change, but it will never be the right thing to do, and will never win in the long run.

So after all of that, we’ve meandered toward our thesis:

Charitable Mythbust # 1: “100 percent of your donation goes to the charity.” This is basically never true. There is always a cost to the charity; it just isn’t always apparent to the participants. People who sell on this basis are counting on your ignorance. Check this out for an interesting analysis of the True Cost of Charitable Giving.

Lest we fall off our soapbox and hurt ourselves, we’ll leave it at that…

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