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

The sole purpose of my previous piece, Defining a Conduit Organization, was to address the more important question of this post, “How to Choose the Right Conduit?”

After all, for many organizations operating outside the United States, specifically those in Israel, fundraising in America plays a vital role in the business strategy of the nonprofit.  Some charities choose to establish an organization known as an “American Friends of” charity to offer American donors a tax-deductible option. Others, however, will decide to use Conduit Organizations to process the donations on their behalf — also a valid option.  But I digress. (If you, on the other hand, would like to digress, see 4 Reasons Why NOT to Establish an “American Friends of” Organization.)

Those Israeli nonprofits that choose the second option of a Conduit (also referred to as an Intermediary or Fiscal Agent) are in luck, as recent years have seen an quasi-explosion in the number of American charities that offer Conduit services.  This being the case, foreign organizations have the luxury and liberty — and some might argue the responsibility and obligation — to investigate the various Intermediaries so as to choose the best fit for the nonprofit. And, yes, all Conduits are by no means the same.

My six criteria for judging a potential Fiscal Agent: Cost, Currency, Time, Payment Method, Communication and Association.

1. COST

What will the Conduit charge me for the service?

The logic being that the less a charity pays in fees, the more money actually makes it the organization’s bank account to fund programmatic and administrative expenses.

Fees generally come in three flavors:

(a) Flat

The advantage of Flat fees is that you know them upfront. While the other options are calculable, this method is the most straight forward.

There are actually two structures for this option:  (1) Flat rate regardless of the amount sent and (2) Flat rate per range of money sent.  For example, $25 up to $2,000, $50 up to $10,000 and $100 up to $50,000 etc.

Example: The Jewish Funders Network, as of March 2010, offers Intermediary Services to nonprofits based in Israel. According to a seminar I attended in March of 2010, it is a flat fee of $200 for transfers up to $100,000. (As this information was obtained when the product was first launched back in March, it may not be up-to-date.)

(b) Percentage

A percentage of the amount transferred, sometimes with a minimum fee.  The advantage of this option is that you “only” pay per what you send.  This seems to be the most popular option.

Example: The Jerusalem Foundation, The New Israel Fund, The One Israel Fund and others use this method.

(c) Free

Use the service will cost the beneficiary nothing. However, to offset costs our reduce expenses, the Intermediary might impose some restrictions on the funds, turnover or method of payment

Example: The P.E.F. offers this service free of charge but will generally only forward the money to the recipient after a month (although some have told me it could be up to three) and in the form of a dollar check. I have heard some organizations get it shorter, but truly the exception.

2. CURRENCY

In what currency will the donation arrive in my account outside the United States? Will the donation be received in the original currency (dollars) or in local currency (in this case, shekels)?  Do I get to choose?

Currency is an important factor for three reasons:

(a) Conversion Rates

Conversion rates can have a big affect on donations received from abroad; namely, the better the rate the more local currency is created when converting the money. As demonstrated above, even a small change in the rate can have a substantial effect. By receiving the money in the original currency, the beneficiary can retain control over when and how much to convert.

(b) Accountability

Certain donors like to know exactly how much buying power their donation has and might demand to know the conversion rates that their money is getting. It is quite possible that an organization might be unable to obtain this information and relevant information from its partnering Conduit.

(c) Cost

Generally speaking, it is more expensive to work with foreign currency than local currency. Thus, receiving money it is original money with come with a higher handling fee for the handling bank or financial institution.  Although, these higher fees might be mitigated by other concerns (like items one or two).

3. TIME

How long will it take me to receive the donation in my account outside the United States?

As the axiom goes, time is money.  Knowing the turn-around time is important for two reasons:

(a) Currency Exposure

One of the biggest unknowns and worries for a nonprofit that relies on donations received in foreign currency is currency fluctuation. The longer a transaction through a Conduits takes, the greater risk to a change in conversion rate.

I have seen firsthand organizations that relied on Intermediaries that didn’t forward monies in a timely manner. By the time the money was received, rates had changed for the worse (though they could just as easily change for the better).

Example: Back in September of 2010 the shekel vs. dollar rate was 3.81. The following Monday morning, only four days later, the rate stood at about 3.77 – a four agurot (4/100 of a shekel) difference. For a donation of $50,000, this four-day delay would have cost the recipient 2,000 shekel (over $500), an over 1% cost (2,000/190,500).

(b) Cashflow

Checks, pledges, and grants come with dates attached.  Budgets are then built around these deadlines.  Donations that are delayed because of a Conduit can severely hamper a nonprofit’s ability to pay its bills or run its programs, possibly leading to ruined reputations, frayed nerves, debt, and/or unexpected credit charges (to name but a few) .

Allow me to tangent for a moment: Conduits that fail to forward monies in a timely fashion are doing a disservice to the end-recipient.  As a matter of fact, receiving the money on time can be even more important that being approved for the donation/grant in the first place. Without a grant or donation a program might never have taken place. No harm, no foul. With the promise of financial support, however, commitments have now been made and money spent.

4. PAYMENT METHOD

Will the money be given to me as a wire transfer or as a check?

This question is more of a concern for those organizations that will be receiving their money in its original currency (dollars).  In Israel, for example, shekel grants and donations can be easily be forwarded by wire, though, even shekel checks clear within a few days.

Foreign currency — whether in Israel or in other countries — is more costly to process and takes longer to clear.   Two points that refer to the earlier questions of Cost and Time.

5. COMMUNICATION

How will I or my donors contact the Conduit if we need to? Or vise versa?

For two reasons, never underestimate the power of communication:

(a) Donors

Donors will have to mail/wire the money to these Conduits. It is imperative when trusting a third party to deal with your donors that it is an organization you can rely on. There will be times when the Intermediary will need to contact your donor — will this be a pleasant interaction that will ensure continued support by your donor and a swift transaction?

Organizations have told me stories of their donors that were driven away or even rescinded their check due to unpleasant experiences with a Conduit.

Furthermore, referring back to an earlier point, will the Intermediary release specific information about your donor’s check/wire, such as wiring dates and conversion rates? This is important information to donors that are looking for transparency and accountability.

(b) Turn-around

Better channels of communication and trust between recipient and Intermediary can help ensure that monies are transferred as efficiently and as quickly as possible.

6. ASSOCIATION

How will my association with this Fiscal Agent affect how people view my organization?

No nonprofit exists in a vacuum. This question can have two types of affects (not mutually exclusive):

(a) Character

Does the organization that is accepting donations on my behalf have religious or political leanings that might color the organization in the eyes of the public (for good or for bad)?  Is the Intermediary known for anything unsavory? What headlines has the Conduit made?  Do people think very highly of the organization and its leadership?

These questions and others like them can alter the flavor of even the most pareve, middle-of-the-road nonprofits.

(b) Fundraising

Will the good name, reputation, or connections of a Conduit help the organization raise more money?

…AND DON’T FORGET TO BE HELPFUL

These Conduits are taking a risk vis-a-vis the I.R.S. by providing this conduit service, regardless if the Intermediary is being paid or not.  Participating charities should, therefore, appreciate a Conduit’s position and provide the necessary paperwork requested of them.

And, of course, being helpful could lead to some of those much-desired exceptions that I mentioned above.

Tizku Lemitzvot,

Shuey

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.