Paypal is one of the leading Internet-payment options in the world for for-profits and nonprofits, alike. With only a PayPal logo and some code easily inserted onto a website, payments are a breeze. And with over 230 million PayPal users worldwide, the chances are good that your customer or donor either already has a PayPal account or trusts the company enough to register for a new one.
Combine the above with the one percent discount PayPal offers qualifying charitable organizations and you’re looking at a strong argument why PayPal should be the online payment-system of choice — for local donations.
However, for international fundraising, PayPal’s “cross-border fees” should prompt nonprofits to tread carefully before jumping head first into this particular pool.
A SCHOOL PURSUES TIME SAVING MEASURES
A little over two months ago, a friend that sits on the Board of a local (a.k.a. Israeli) educational institution called me with some questions about PayPal. I’ll repeat some of our conversation as I believe the school’s challenges are shared by many.
The Israeli school also has an international program, specifically a large contingent of students from the United States. To improve cash flow and minimize aggravation, the school was pursuing ways to get the students to pay their down payment in a more a timely manner.
Someone suggested PayPal and the school was hooked. Written payments were a multi-step process — reading the letter, finding the check book, and then actually having to mail the check — that was failing to encourage timely payments.
With the introduction of PayPal into the equation, the school followed up a letter campaign with an email that contained a link to pay via PayPal. The result was right on target. In just a week over 40% of the students had paid their down payment. A far higher number in a far shorter period of time than ever before.
It was then that the school wanted to forward the money collected from their PayPal Israel account to their bank account in Israel. That’s when things took a turn for the unexpected and I was subsequently called.
REDUCED RATE FOR NONPROFITS
PayPal understands the important role it plays in fundraising. Whether for altruistic or capitalistic reasons, the company graciously offers qualified nonprofit organizations with a reduced rate of 2.4% — instead of the regular 3.4% handling fee — a very competitive rate. (And let’s be honest, nothing in life that’s worth it, is free.)
However, when money arrives from outside your registered country, PayPal adds other fees to the mix.
But first, some ground rules…
Principle 1: Recipient Pays the Fees
Whether sending a donation or payment, the recipient/seller pays the fees. The service is essentially free to the sending/buyer. In other words, the nonprofit absorbs any and all costs.
Principle 2: Local Organization Connects to Local PayPal
PayPal exists in tens of countries. Essentially, each country is a separate corporation. So nonprofits in Israel, for example, will open a PayPal account with PayPal Israel. American charities will register with PayPal USA. And so on.
Principle 3: Money Released Only to Local Bank Accounts
One of the benefits is that PayPal can accept money from other PayPal accounts throughout the world in a variety of currencies. However, the local PayPal company will only release the money to a bank in the same country. So PayPal Israel, following the example, will only release an organization’s money to a bank account located in Israel.
Principle 4: Money Released Only in Local Currency
Regardless of the currency in which the money was originally sent, PayPal will only release the money in the recipient’s local currency. Thus, PayPal Israel will only release (and obviously convert) the money in New Israel Shekels.
COSTS CAN MORE THAN DOUBLE WHEN ARRIVING FROM OVERSEAS
The various additional charges can more than double the 2.4% modest fee to a somewhat daunting 5.4%. This is assuming, of course, that the nonprofit is actually approved for the 1% discount mentioned earlier. (Otherwise, it’s 6.4%.)
Continuing the example mentioned earlier, this Israeli educational institution opened a PayPal account with PayPal Israel. Money arrived from outside Israel, in this case from the United States, incurring a “Cross-Border” Fee. As the money was received in Dollars, when the order was issued to PayPal to release the money into the organization’s bank account in Israel, it was then converted into Shekel, incurring a Conversion Fee.
Base Price = 2.4%
+ Cross-Border Fee = 0.5%
+ Conversion Fee = 2.5%
Total = 5.4%
What I didn’t include, but which is important to note, is the actual rate of exchange. It is quite possible that the rate itself isn’t the best. While not an actual fee, a poor rate of exchange does ultimately mean that less money reaches the charity’s coffers.
Just so that I don’t leave you in suspense…
As you can imagine, the call I got from this particular board member was to find out if there was anyway to get the money out of PayPal without paying the higher rate of 5.4%. Unfortunately, there was no way to avoid paying the 5.4%, short of returning the money back to the students’ accounts.
It is important to note that the misunderstanding of the fee structure wasn’t necessarily PayPal’s fault. Sometimes, misunderstandings do happen (not that that made him feel better about the situation).
BOTTOM LINE: USE PAYPAL FOR INTERNATIONAL DONATIONS, OR NOT?
Depends. (Yeah, I know that seems to be my answer for just about everything.)
The following is a list of considerations that should provide some concrete information to help answer this question:
1. Ease of Use
Whether for local or international fundraising, donating through PayPal is a cinch. Let us not forgot the percentage increase of students that paid their down payment. Time is money, and getting your money in a timely fashion could in the end certainly be worth the investment.
2. ETA (Estimated Time of Arrival)
PayPal minimizes lag, helping the money reach its intended destination in a timely fashion. Once the PayPal account is setup (arguably, the biggest unknown of this whole equation), money can be in the nonprofit’s bank account and ready to use in just day(s) after the payment is made.
So the price can jump up to 5.4% of the donation, this doens’t mean that other options are cheaper. Yes, it is higher, but probably not the highest.
4. Tax Deduction
PayPal is merely a funnel, not a conduit. Those foreign organizations that have tax-exempt status can issue tax-deductible receipts through PayPal. Those that don’t, might need another option.
When fundraising, donors like to know who is getting the money and that it is being received. PayPal receipts clearly show who received the money and that the money arrived in the beneficiary’s PayPal account.
Whatever you decide, be sure that your decision is based on rational factors. It is the only way to measure the service’s effectiveness and to provide adequate answers should curious donors question your choice of payment method.
Additional Resources: 6 Questions to Help Choose the Right Conduit Organization
Disclaimer: This blog houses my personal opinions and is for informational purposes only — not advice. As charity laws can be quite complex, please refer all questions to qualified and licensed professionals. Read the full disclaimer.
Photo Credit: Free Money Collection in Cash by epSos.de
Why can’t this work for the school in question too?
I opened my paypal mapped to a USA bank account (RBC Bank).
Money that are sent to me are sent in dollars, sit in my paypal account in dollars, and when i feel like transfering them for free to my US bank account, they are in dollars. When I want to use them in Israel, I write a dollar check and bring it to my local money changer, all receipted, photocopied, and above board.
Thanks for the very practical question.
First, this most certainly can work. Though for the record, I am personally against nonprofits using money changers. But yes, for organizations that have international arms or “Friends of” charities that help fundraise, there is nothing preventing these foreign organizations from setting up PayPal accounts in their respective countries. Then, they can either deposit checks directly into their Israeli bank account or wire the money over. This, I believe, is actually an ideal way to do things. (For more on this topic, please see my earlier post “3 Dangers that Money Changers Pose to Charities.”)
Second, not every organization has an office/charity overseas. In this particular case, this school did but their American accountant, I was told, advised them against it. I am wary to discuss this aspect of the story as I am not an accountant or lawyer. It is possible other charities might face similar challenges from their supporting organizations registered abroad, as well.
Third, some organizations have no choice but to do it this way. For example, an Israeli charity that also maintains a store that promotes and sells items on behalf of the charity — like a Museum or synagogue, for example. They cannot forward this aspect of their “business” to their “Friends of” charity.
But, again, for those that do, your idea is certainly a cost-saving option that I have seen work.
Thanks for checking in,
This is such a great breakdown of a complex process. I’d love to see this built out into a decision-tree of sorts, and/or another blog post that talks about international fundraising options, period. For example, is Amazon Payments a good option internationally? I loved the article about choosing the right conduit organization, so I’d also love to read your analysis about choosing the right donation acceptance mechanism for accepting international donations. Have you written about this subject previously?
You just love giving me more work, eh?
First, thanks for the warm words.
Second, I have not actually written about how to choose the best online donation processor. But it is interesting that you ask.
Charlie Kalech and I are hosting a mini-seminar for Israeli nonprofits on just this subject on July 5th. We’ve invited some of the big players to “pitch” to the audience so we can learn the exact differences between the options.
You might be getting a post or two after the event. See, some wishes do come true…
I enjoyed your informative post. Can you explain what kind of non-profit qualifies for the 1% discount in PayPal fees? I am having trouble finding this information elsewhere.
This post is based on conversation I had with PayPal reps in Israel and the United States. As such, my information might be slightly out of date.
Essentially, Paypal just wants to see that a charity is registered as such. They weren’t that sophisticated to understand Nihul Takin or Se’if 46. Of course, this was a while ago and things might have changed. My recommendation is to call them up. PayPal also hired a new nonprofit rep about a half a year ago. Email me if you want her contact details.
Thanks for dropping me a line.