We know that online fundraising can be more effective than traditional offline fundraising (bake sales, car washes, raffles, to name a few). So when companies market their online platform as free, is it too good to be true? In this article, we examine the reality of free fundraising.
First, let’s cover the main types of fees associated with online fundraising: the platform fee and the payment processing fee.
Most companies charge a platform fee to cover costs associated with building and operating their fundraising solutions. The fee ranges from 0-20%, with most companies charging either 0% or 5%.
What are companies doing to earn this fee? First, there’s the basics like servers and internet connection needed to keep the website up and running. The last thing you want is for the site to go down when your friends and family are trying to donate. There’s also customer support to help organizers and donors with their questions and issues. It’s important to note that these companies (GoFundMe, YouCaring, Facebook, IndieGoGo, etc.) are for-profit companies and are competing with each other to invest in building the best platform for fundraisers.
So how do companies that charge a 0% platform fee or are “free” work? We’ll discuss that right after we explain the payment processing fee.
Payment Processing Fees
There is a lot of complexity behind processing credit card donations and safely transferring those funds to the right people. Fundraising sites often use a payment processor to facilitate donations and withdrawals. PayPal is one of the largest and most well-known payment processors out there. Some other popular payment processors include WePay, Stripe, and Adyen. The payment processing fees cover credit card processing, payment fraud, and payment-related services. While platform fees vary, most companies charge 2.9% + $0.30 per donation. This seems to be the industry standard with very little variability.
So, what does it really mean when a site says it’s “free”?
We’re always skeptical when we hear something is “free.” When companies (GoFundMe, YouCaring, Generosity) charge a 0% platform fee, they make the marketing claim to be “free.” This is true as long as you remember that platforms will continue to charge the payment processing fee. In lieu of charging a platform fee, they ask your donors for a “voluntary tip” during the donation flow. Your donors will need to take a few steps to opt out of the tip. Keep in mind that suggested tip amounts can be automatically set as high as 15%.
This is what “free” crowdfunding for personal fundraising really means: There is no platform fee automatically deducted. Instead, donors can choose to financially support the crowdfunding platform in the form of a tip. Many personal fundraising sites are moving towards the tipping model. Popular sites that use this model include GoFundMe, YouCaring, and Generosity (IndieGoGo’s personal-focused fundraising site). Just remember that if you choose one of those sites, you’ll still be on the hook for payment processing fees, so plan accordingly when setting your goal.
Now that we’ve covered 0% platform fees and tipping, let’s talk about two other approaches to pricing:
- Deduct a fee from the organizer’s account before they withdraw the money. This has been one of the most common ways for fundraising sites to take their cut. Example: A donor gives you $100, and when you go to withdraw, you have a balance of around $91 after platform fees and payment processing fees have been deducted. Donors may see a small disclaimer notifying them that they’re agreeing to have this fee deducted from their donation, but it’s not always so obvious. The burden falls on the organizer to know the fees and consider what’s going to be deducted when setting their fundraising goal.
- Give donors the option to cover the fee, also known as “Donors Cover Fees” (DCF). With this model, donors will see the option to cover the platform and/or payment processing fees when making their donation. Keep in mind that with this model, if the donor doesn’t choose to cover the fee, the organizer still has to pay it.
What does this all mean for you? In short, it’s important to read the fine print when using a crowdfunding platform. Sites that claim to be free may not be truly free and you might run into surprises later. This doesn’t mean you should not use these platforms, but it does mean you will want to evaluate the best site to use based on your needs. Knowing that all sites charge some form of fees, look to other things the site may be able to offer you, such as great customer support, innovative platform features, and their public reputation.