As Wallets Open For Haiti, Credit Card Companies Take A Big Cut
Update at 9:03 AM Friday: Visa, MasterCard, American Express and Discover have now all announced that they will waive fees for some donations related to the crisis in Haiti.
As a massive human tragedy unfolds in Haiti, relief organizations are soliciting credit-card donations through their hotlines and websites. About 97 percent of these donations will actually make it to the designated organizations -- but the other 3 percent will be skimmed off by banks and credit card companies to cover their "transaction costs."
Thanks to this hidden fee, American banks and credit card companies are making huge profits -- somewhere in the neighborhood of $250 million a year -- off of people's charitable donations, according to a Huffington Post analysis.
Those profits rise sharply after major disasters, when humanitarian relief organizations such as Oxfam and Operation USA take in more than 85 percent of their donations via credit card -- and the credit card providers, with only a few exceptions, refuse to waive their fees.
Credit card companies have only been willing to waive their processing fee for charity once, Richard Walden, the CEO of Operation USA, tells the Huffington Post, and that was for the tsunami disaster of 2004.
"After the tsunami, we had thousands of donations, and American Express and I think one other company temporarily waived their fees. So if this thing ramps up, we'll try to get in touch with these banks and see if they'll waive the fee again for us."
Bowing to enormous public pressure in the United Kingdom after the tsunami, British credit card companies have pledged to "waiv[e] interchange fees for all cross-charity and disaster or emergency appeals," according to the UK Card Association website.
One notable exception to the rule in this country is Capital One bank. Through its "No Hassle Giving Site", the bank waives transaction costs for holders of its Visa or MasterCard cards, so that 100 percent of people's donations goes to their chosen charity.
"We are pleased to be able to donate these costs, and we believe this will generate customer loyalty and an enduring customer franchise," said Pam Girardo, a spokesperson for Capital One.
Ben Woolsey, director of marketing and consumer research at Creditcards.com, says the hidden processing fees tacked onto all credit card donations cover far more than the transaction costs, allowing the issuing banks, as well as companies like Visa, MasterCard and American Express, to generate significant profits off of online charitable donations.
"They certainly profit off of these fees," Woolsey said. "Charities are treated like any other merchant. The credit card company bleeds a few percentage points off each transaction; that's central to their business model."
Non-profits are reluctant to criticize the credit card companies that are providing them a crucial service because there is too much money at stake, and they have no lower-cost options because the four major credit card companies have a small monopoly on the industry.
Peter Larson, director of annual giving at the Washington Humane Society, said: "It's unfortunate that a portion of our individual contributions are eaten up by processing fees, but that's the nature of business. We have no choice but to use credit cards because without them, we would lose a great deal of money in donations."
Some charities are able to negotiate a lower processing fee than regular merchants, whose rates can run as high as 5 percent. Habitat for Humanity reports that it pays about 2.15 percent of its donations to credit card processing companies, St. Jude's pays about 2.5 percent, and all charitable organizations that qualify for American Express's "Giving Express" program get a 2.25 percent processing rate. But even these fees are far greater than the marginal cost of the online transaction.
"I have no doubt that millions and millions of dollars are being made off of people's donations, and it's extremely inefficient and wasteful," said Ken Berger, President and CEO of Charity Navigator, an independent charity evaluator. "It would be great if credit card companies could reduce their profit knowing its going to an organization with a mission to help people. They need to step up to the plate and take a lead role in voluntarily cutting their fees."
Spokespersons for Visa and American Express declined to say whether they would consider waiving their fees for the Haiti disaster, or for all charitable donations. But Bill Strathmann, CEO of the online charity portal Network for Good, says they won't: "The reason credit card companies don't waive fees for charities is that they have so many corporate partners who drive high volume through their system. A company like Walmart could say, 'Hey, you're giving them a bettter rate? Last I looked I was passing billions of dollars through your company.'"
According to Strathmann, whose company partners with Capital One to encourage cost-free donating, legislators may have to take the issue into their own hands.
"I've always wanted to take this to Capitol Hill," said Strathmann. "There was legislation that made charitable donations tax-deductible, and there's going to have to be similar legislation that either subsidizes those credit card fees for non-profits or bars the fees altogether. There's got to be a better model for encouraging donations."
Right now, the government's only role is to actually subsidize the credit-card skim; charitable donations are 100 percent tax deductible, even when only, say, 97 percent of the donation goes to charity.
Without a legislative solution, the only option for charities is to petition banks to voluntarily waive their fees.
"We don't want a corporate contribution from the other side of American Express, we want them to say to legitimate NGOs that they're waiving the bank fee," said Walden. "It's probably a good week to ask, because they're about to give out their bonuses."
Are you angry that credit-card companies and banks are taking a cut of your charitable contributions? E-mail email@example.com.