Tuesday, May 21, 2013

The Hidden Cost of Online Donations

One of the big takeaways from Frontline's recent story on the looming crisis in retirement accounts is that for all the efforts spent on deciding proper asset mix and risk tolerance, it is sometimes the little things that count most.  In that case, the "little things" were the fees passed on by actively managed funds that can quickly erode returns without employees even realizing it.  When watching that episode, I could not help but think of the similarities to small costs eroding charitable activities.  In this case, for all the concern about what charities do with donor money (which is, of course, justified), there are hidden costs that actually limit what donor funds even reach charities.  In this case, the important "little things" are credit card and processing fees that slowly cut into donations.

When donors send a check or give cash to charities, the processing costs are salient even if minor -- donors have to pay to print checks, incur postage costs, transportation time, etc.  More and more, however, donors are avoiding such hassles and making online donations.  These online donations, however, entail hidden fees that can undercut the donation itself.  Take the case of a $100 credit card donation to ABC charity.  The donation, even if made on the charity's website, is made through a processor.  The interested parties here are: (i) the donor; (ii) the bank that issued the donor's credit card; (iii) the credit card company (e.g. VISA); (iv) the donation processor; and (v) ABC charity.  When the $100 donation is made, the issuing bank charges an interchange fee (say around 2%).  The interchange fee is paid to compensate the bank for the float it provides -- it is giving the charity money today but does not get paid back by the donor for another month or so.  The credit card company then charges an assessment which varies based on the card company and the nature of the transaction, but let's say that's around 0.25%.  The processor then charges a markup to cover its costs; these markups vary substantially but can bring the total cost to 3-5% of the original donation.  This means that ABC charity will, on average, receive only $95-97 of the $100 donation.  Ok, the amount may seem small, but think of the volume of money that donors think is going to their charity that is not.  The total amount of donation funds handed over to banks has been estimated to be around $250 million annually.  What is a donor to do?  It turns out there are some cheaper options available.

Of course, this is not an exhaustive list and I am sure I have failed to mention other lower-cost options.  Please add others in comments; my goal is not to promote any particular payment option but to help us all consider them.  In an ideal world, all banks and credit card companies would waive fees for donations (which they have done on rare occasions).  Until that time, however, the best we can do is make use of those options that offer lower costs so as to direct more funds to the organizations and causes we care about.


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