Charitable Giving: Why Fewer Is More

(Photo: Howard Lake)

December is the holiday giving season for many, but there are a lot of charities competing for your dollars, and it can be hard to know where they will do the most good.

I’ve written before about why you should be wary of sites that rank charities by administrative expenses. It tells you nothing about if the actual effectiveness of a charity’s activities. The recent Freakonomics Radio episode “Free-conomics” also pointed out that many charities themselves don’t even know if what they’re doing actually works.  This was one of the reasons I founded a non-profit which carries out research around the world to find out exactly which efforts to fight poverty work best. 

As well as choosing which charities to support, we also make choices about how we support them. Often overlooked, this choice can be just as important in influencing what our money actually achieves. Below, two experts in philanthropy, Caroline Fiennes and Phil Buchanan, explain one crucial effect of how we give. Fiennes is the founder of Giving Evidence and the author of It Ain’t What You Give, It’s the Way That You Give It: Making Charitable Donations That Get ResultsPhil Buchanan is president of the Center for Effective Philanthropy

Charitable Giving: Why Fewer Is More
By Caroline Fiennes and Phil Buchanan

As any 10-year-old can tell you, multiplication is commutative: 2 x $70 is the same as 70 x $2.

But not in charitable giving, it turns out. Making two donations of $70 is a good deal more valuable to charity than making 70 donations of $2.

The reason lies in the fixed transaction costs. Many charities (unavoidably) get charged a fee for each deposit into their bank account. So two large donations create only two dollops of that fee, whereas 70 smaller donations attract 70 dollops. That fee might be $0.25 per transaction. So if the $140 is given in two donations, less than 1 percent of the two donations gets lost in transit between the donor and the charity; if the $140 is given in 70 donations, 12.5 percent gets lost in transit; and if $140 were given in 140 donations of $1, fully 25 percent would fail to reach the charity. Of course, if you gave 1400 donations of only $0.25 each, nothing would reach the charity at all.

The pattern persists even if you’re giving a lot. To get money from philanthropic foundations, charities typically have to apply and then later report on what they then do with the money. This work creates another type of transaction cost. Research by the U.S. Center for Effective Philanthropy shows that these transaction costs are much higher if the foundation makes several small grants than if it makes a few large ones of the same total value:

Median time which charities spend applying & reporting on a grant of:

Median amount raised per hour spent

No. hours work in raising & managing $100,000

$10,000

12 hours

$833 /hour

120 (three weeks)

$100,000

27 hours

$3,704 /hour

27   (less than four days)

So when you’re choosing charities to support this Christmas, divide your total giving between fewer charities, whatever the scale of your giving.

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COMMENTS: 15


  1. Seminymous Coward says:

    Well, that clearly doesn’t apply to cash, as they can just lump it together. The penny and the nickel surely hurt that, though.

    Also, they really can’t get the banks to waive the transaction fees and deduct them on their taxes as charitable donations? In fact, the regulators should probably just go ahead and force the banks to do so for all 501(c) s.

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    • Brian says:

      At my former employer I oversaw gift entry and reporting we used two merchant services for processing credit cards. For gifts under $100 we went with a company that charged a percentage of the gift amount. For gifts over $100 we used a company that charged us a flat rate plus a smaller percentage. It helped to reduce cost in fees on the larger gifts.

      No need to force banks for bypass the fee, after all they are providing a service. Some NPOs have gone to asking donors if they would like to pay the processing fee in addition to making their donation so that they know how much of their donation is going to the cause.

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      • Seminymous Coward says:

        Those banks are receiving a variety of services from the government as well, e.g. the FDIC, Federal-Reserve-mediated interbank reserve loans, the Federal-Reserve-provided 60% of ACH, interest on both mandatory and excess reserves, and, for the largest, a silent promise to always bail them out no matter what risks they took. Anyway, I wasn’t suggesting they mandate free service; I was suggesting they mandate that the service be paid for by the government via tax deductions. In retrospect, though, I’m sure they’d find some way to abuse it; the government just can’t control institutions with that much money.

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    • Ian M says:

      If you do not get a receipt for giving cash then you are better off to give by cheque, debit or credit card. Yes, the charity would incur more fees but because of tax credits and or deductions (depending on where you live), you could afford to give the charity more if you include the tax credit you will receive. This would way more than offset the fees for cheques, debit or credit cards.

      This of course does not consider the cost of the government collecting less tax but I would rather give to charity than the government.

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  2. Jeff says:

    My local PBS station has been advertising a “Sustaining Member Program”. Essentially, it auto-deducts from your bank account or credit card each month and lets you spread out your donation. This seems like a good way to avoid some of those costs – there will be lower costs if you use your bank account and they won’t have to call or mail renewal forms to you as long as you’re enrolled.

    Also, I suspect the costs to solicit donations from previous donors are much higher than transaction fees on single donations.

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  3. Ashish Choudhury says:

    More podcasts please and more often. We don’t have enough.
    Thank you,

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  4. Bill says:

    Here’s another reason to concentrate giving on fewer charities. If I split my money over 10 charities, each one of them will be paying fundraisers to repeatedly ask me for more. If I give everything to just one charity, far less money will be wasted contacting me for additional donations.

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  5. Doug M says:

    I think it was Robert Samulson who made this arguement.

    When you spend money on your self, you think of your greatest desire, and you spend a marginal dollar to satisfy that desire. Then you repeat the analysis. You may allocate more dollars to fufill that desire. Eventually, though, that desire is satsfied, and you spend your money on many things.

    But if you do the same calculus when you give money away, you get different results. Think of the biggest societal problem you would like to solve. Allocate a few dollars to solve that problem. Now what is the biggest problem out there. Probably still the same thing. Unless you have Gatesian resources, it is highly unlikely that an individual can allocate enough money to a cause that their marginal contribution shrinks the problem sufficently that a person should diversify across multiple causes.

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  6. EasySolution says:

    This totally makes sense…so instead of me donating tiny amounts from my paltry earnings, and having most of it dedicated to administrative costs, we could have the wealthy corporations donate a few millions each and we’d be done.

    I can think of one company in particular who has about $10 BILLION in CASH.

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    • Enter your name... says:

      If it were up to me, it would be illegal for corporations to make “donations”. They’d have to classify it all as “advertising” and explain to their shareholders why they wanted to advertise their product to that fundraiser, instead of paying those profits to the owners and letting the shareholders decide which charities to support.

      Of course, I’d do the same with political contributions. Shareholders could club together to promote their own interests, but shareholders who didn’t think it a good use of their money wouldn’t be required to support the political lobbying.

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      • Seminymous Coward says:

        Literally nothing is different about this “change” except the term used. They’re already accountable to the shareholders for donations, like any other disbursement, and the shareholders know the money is being spent for advertisement, goodwill, and tax advantage.

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  7. Des says:

    OTOH – many charities would prefer to incur the additional costs of multiple deposits to have the donations be regular monthly rather than simply “whenever I have the money”. Regular donations allow charities to better manage their budget – just like having a regular paycheck allows people to budget better.

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  8. Lyn Martin says:

    Sir:
    I heard you speaking of the services of a pro bono economist for charities to promote the economic contribution they make, beyond their established purpose. In 2011 We Care disbursed over $60,000 to keep people in housing, and to keep the untilities on – keeping households of children and single parents sustainable. Our operating expenses are less than 2%. I would be very interested to know how much more our emergency financial assistance has helped our local economy. If you ever get a pro bono economist in the U.S. please put us on your list.
    Respectfully,
    Lyn Martin, We Care Treasurer

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  9. Ian Ker says:

    The point about giving is well-made – and becomes even stronger if you can actually persuade the other 68 charities not to waste their (and your) time phoning you to ask for donations.

    However, the transaction costs argument for a philanthropic foundation is less clear, as it is missing a key element – the amount of competition for grants. The larger the grant, the more organisations are likely to compete for it and the more complex will be both the submissions and the assessment process.

    The larger grant might seem more cost-effective, but this advantage is reduced by the change in the probability of being successful. If we assume that the total funding available is fixed and the number of applicants is unaffected by the specific quantum of the grant, the probability of being successful for a $100,000 grant is one-tenth of that for a $10,000 grant, If we further assume that 50% of the charity’s cost is for application and 50% for reporting, a charity will have to spend 148.5 hours (10 * 13.5 for applications plus 13.5 for reporting on the one successful $100,000 grant application) which means the amount raised per hour spent is $673 – less than for the $10,000 grant.

    There is an added problem (or two) from over-reliance on larger grants. First, smaller organisations are likely to be disadvantaged as they are less well-equipped to apply for larger grants and, indeed, might not need them for their particular activities. Second, small grants can often be used to leverage funding from other sources (matching grants) whereas larger grants will often not qualify for such funding.

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