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…

PAYPAL 101

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.

HAPPY ENDING?

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.

3. Cost

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.

5. Transparency

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.

Tizku Lemitzvot,

Shuey

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

Links to the articles I’ve reviewed and posted to Twitter between February 28 – March 6, 2011.  This week’s topics include:  U.S. Regulations  •  Israel  •  Strategy & Governance •  Fundraising & Marketing  •  Social Media & Internet

You can stay up-to-date with these articles and more by following me on Twitter or subscribing to receive The Nonprofit Banker by email.

Tizku Lemitzvot,

Shuey

U.S. REGULATIONS

Board Meeting Minutes: always keep in mind who will be reading them, by Nonprofitlawyer http://ow.ly/1s6tLx via GTak (great ideas regardless of the country)

DonKramer: If a donor relocates to dif state, do you need to register to solicit in that state? http://ow.ly/1s5F0B // often overlooked!

DonKramer: Does the law exempt churches from disclosing their finances, salaries? http://ow.ly/1s6y4u // “churches” of any religion

DonKramer: A nonprofit receives a store gift card as a donation. How to treat it on income statement/balance sheet? http://ow.ly/1s6Mgz

IRSnews: You may be eligible for 1 or more of these valuable IRS tax credits http://ow.ly/1s6O6G via IndSector

ISRAEL

Last week’s interest rate hike could be re first of many if certain market conditions aren’t met http://ow.ly/45jBC

GOVERNANCE & STRATEGY

4 questions to help decide the best legal structure for a new nonprofit (by Benetech) http://ow.ly/1s7TLy via P2173

MarionConway: From a Foundation Perspective – What Makes An Effective Nonprofit? http://ow.ly/1s6MwQ via Npmaven

FUNDRAISING & MARKETING

GailPerrync: Where will the money come from? My Golden Rules for Identifying Donor Prospects http://ow.ly/42jWt

Weigh in: semantics or 2 truly dif approaches? “Investment Approach to Philanthropy” by Tactphil http://ow.ly/1s7Qm6

IndSector: Value of a volunteer hr in Texas is $21.47. What is it in your state? http://ow.ly/1s7KPp

Thoughtful piece on how new Gen defines adulthood. Gr8 for understanding young donors. (by RosettaThurman) http://ow.ly/1s7Lya

Augieray & Jer979: 6 Marketing Lessons From A Hollywood Movie Producer http://ow.ly/1s6y24

SOCIAL MEDIA & INTERNET

Comprehensive list of tools to help you go “officeless” http://ow.ly/1s5Qgf via NAFund & Practicalecomm & NetSuiteorg

AlisonRapping & NonprofitMediaW: Great list! 22 Hot New Social Media Tools http://ow.ly/1s6M1P via Rjleaman & CindyKing

Very. Good. Advice. Augieray: Gmail Failure Shows Danger Of Becoming Too Cloud-Dependent http://ow.ly/1s6O47

Links to the articles I’ve reviewed and posted to Twitter between February 7 – 14, 2010. This week’s topics include:  Regulations & Government  •  Currency in Israel  •  Governance & Strategy  •  Fundraising & Marketing  •  Social Media & Internet

You can stay up-to-date with these articles and more by following me on Twitter or subscribing to receive The Nonprofit Banker by email.

Tizku Lemitzvot,

Shuey

REGULATIONS & GOVERNMENT

• Pndblog: International Nonprofit Organizations Facing Increased Scrutiny in Haiti http://ow.ly/1s1AwH
• VERY informative! US Gov shifting financial woes onto nonprofit orgs, Part 1 http://ow.ly/1s1Poi via Kenscommentary
• JoanneFritz: What Is Considered a Faith-Based Nonprofit in the U.S.? http://ow.ly/1s1YQ2 via FundraisingNews
• Charitylawyer: Charitable Solicitation Laws Pt 1: Commercial Co-Venture (aka Cause Marketing) http://ow.ly/1s2vif
• NYTimes: Tax Cut Deal Could Benefit Charities http://ow.ly/1s2EVT (also a good review of different tax-saving gift options) via GTak

CURRENCY IN ISRAEL

• Haaretz: Bank of Israel launched its 3rd salvo against foreign-currency-exchange speculators http://ow.ly/1s1Ps0

STRATEGY & GOVERNANCE

• Change.org documents its mission change via its new website & legal status as a B Corp http://ow.ly/1s2I2S
• Johnhaydon: On WildApricot > Tips 4 Building Productive Relationships w/ Your Leader Partner http://ow.ly/1bfY8f
• ArtsAppeal: Cutting admin staff is bad 4 arts (& all nonprofit) orgs in long run http://ow.ly/3QUCr via Nonprofit_Mo
• Franswaa: SEO, Email & Social Media as part of a digital strategy http://ow.ly/1s1OtN // Great fundamentals & links!

FUNDRAISING & MARKETING

• HildyGottlieb: Why Board Members Don’t Want to Fundraise & What They CAN do Instead http://ow.ly/1s2CDP
• FundraisingNews: Every fundraising appeal should be a learning experience, by KatyaN4G http://ow.ly/1s1AxP
• FundraisingNews: Donors trimmed charitable giving in 2010 http://ow.ly/1s1ZUX
• FundraisingNews: Study Finds Nonprofit Finances Looking Up http://ow.ly/1s2GKn
• Kenneth Cole’s PR Mistake: Thinking of short-term gain w/out strategic context http://ow.ly/1s1YMq via CharlieKalech
• Nptechblogs: Groupon’s Flop: When Cause Marketing Goes Horribly Wrong http://ow.ly/1s204A (via Causewired) // Worse than Kennith Cole?

SOCIAL MEDIA & INTERNET

• Franswaa: How to Manage a Volunteer Led Blog that Rocks http://ow.ly/1s1YMV
• Nptechblogs: On Blackbaud: Making Your Website Mobile Friendly http://ow.ly/1s1YO0 // Concrete tips & good links
• Before you tweet, know why you’re doing it, by KatyaN4G http://ow.ly/1s2t9W via FundraisingNews
• Let’s think outside the box for new ways to use 4square to donate, by Joewaters http://ow.ly/1s2tkJ via Johnhaydon
• Johnhaydon: Nonprofit orgs & Facebook: Pages, not Profiles (on Socialbrite) http://ow.ly/1s2tCq via Nptechblogs: // short & to the point
• GuerrillaNPO: 10 Social Media Strategies That Work for Nonprofits http://ow.ly/3TA0s // Excellent principles