By Steve Kelman

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This week in online disintermediation: Charities

transferring funds

One of the most pervasive phenomena of the Internet age has been disintermediation -- threats to established brokers or middlemen between consumers and service providers. This has very much hit the media, of course. With the rise of massive open online courses, it is starting to hit higher education. And now, according to a fascinating article in The New York Times, it is touching traditional nonprofits such as the United Way or Save the Children.

Nonprofits traditionally have acted as middlemen between people who want to contribute money to help a cause and the beneficiaries of said giving. The nonprofits help in choosing the appropriate beneficiaries to help, monitoring the giving, and often even deliver the service to beneficiaries as well. As the article notes, some charities have traditionally tried to create a personal connection between the giver and the beneficiary, as in the theme in Save the Children ads that you would "adopt" a specific child, but in reality these connections were never that direct.

Now, however, we are seeing the growth of firms (often for-profit) that advertise a whole list of very specific beneficiaries -- for example, "a young girl who needs a stem-cell treatment," "a woman who wants money to adopt a child" or "a classroom of low-income students who want to visit Washington." The firm then invites people to contribute specifically to whichever of these causes is most appealing.

What they are doing, basically, is crowdsourcing charity. Crowdfunding still constitutes only about 1 percent of charitable contributions, but while charitable contributions in general are stagnant, crowdfunding is growing rapidly.

As with other examples of crowdfunding, there is much to like in this model. By providing new, attractive options to people, it may increase the total pool of donations, not necessarily eating into traditional charities but providing net new resources to the charitable world. And it provides a democratic, market test of whether a cause is attractive to people, rather than bundling a huge range of causes, some of which a donor may like less or not at all.

Nonetheless, as with other examples of disintermediation that have arisen in the Internet age, there are also grounds for concern. "Legacy" charities have built up expert capacity for vetting (and monitoring) causes, and if this were to disappear or become severely threatened by a crowdfunding model, we might on balance end up with a poorer group of causes that get supported. Legacy charities are also a social, and even political, force for the very idea of giving, which would be much harder for the decentralized crowdfunding initiatives to match. So in a world without strong "legacy" charities, the idea of the importance of giving would probably get less attention in society.

This is why people say the Internet is disruptive. And the disruption has costs as well as benefits.

The article suggests a possible middle ground that is being pursued by some charities, which is to offer crowdfunding options along with general donations as part of their own activities. This might work, but it will require some education by the charities on the expert role they play and why not every one of their donors will want to choose individual projects. I suspect that as more and more Internet disruptions continue, various kinds of adaptations of this sort that blend the new and the "legacy" institutions will become increasingly common.

Posted by Steve Kelman on Mar 04, 2014 at 10:09 AM


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