Carnegie Reporter, Vol. 4, No. 1 | Hands Across the Internet: How Nonprofits Reach Out Online, page 4

Lots of organizations, such as Accion International (www.accion.org/), are engaged in microcredit lending all over the Third World. The genius of Kiva, though, is that it doesn’t take money from donors or lenders and toss it into a big pot, so that lenders and borrowers are anonymous to one another. Instead, Kiva allows lenders (and lenders can also be donors) to fund specific entrepreneurs of their own choosing. You can see a picture of a hopeful entrepreneur, read his or her story, and then follow the individual's exploits on the web. “People are really excited to be lending to other people on the Internet,” says Kiva co-founder Matthew Flannery. Or, as the web site puts it, “Kiva is using the power of the Internet to facilitate one-to-one connections that were previously prohibitively expensive.”

The Internet is the basis not just of what Kiva does, but how it does it. E-mail facilitates communications all over the world, and Skype, the cut-rate Internet phone service, is used for voice communications. PayPal, the Internet payment system owned by eBay, is used to receive money for lending and to convey loan payments back to the United States; it provides free payment processing, says Kiva’s president, Premal Shah, who worked at PayPal before coming to Kiva. Lenders who provide funds have the option of re-lending the money, donating it to Kiva outright, or simply taking it back and walking away.

Soon after the site got going, word of Kiva’s efforts appeared on DailyKos (www.dailykos.com), a liberal blog, and in yet another demonstration of the Internet’s power, interest in the site exploded. Money poured in, the first 50 businesses were funded almost instantly, and Kiva quickly had no new ones to offer to eager lenders coming to the site as the result of attention in the blogosphere.

Matt Flannery soon quit his full-time job to devote himself to the new venture and, eventually, Shah came aboard. Today, Shah says, Kiva makes loans through partner organizations all over the world, including in Cambodia, Ecuador, Gaza, Kenya, Nicaragua, Senegal, Tanzania and Uganda. In Bulgaria, for example, the local partners are Peace Corps volunteers, according to Shah, who says the organization has about 1,150 lenders—and roughly 2,000 more prospective lenders who signed up when Kiva had run out of entrepreneurs to fund. The average lender makes one or more loans of $80 each and since some make more than one loan, the total is roughly $200,000. These lenders have funded nearly 400 micro-ventures—tiny businesses founded by poor entrepreneurs. The average loan size is about $500.

Kiva charges no interest, but its partners in the field charge anywhere from 10 to 40 percent annually, which sounds high but is not unusual in the world of microfinance given the local cost of money for borrowers with no collateral—not to mention the high cost of making and servicing these loans. Says Shah, “We’re basically the lowest cost source of capital you can find because it’s from individuals who value an emotional return rather than a financial one.”

Although Shah says that so far Kiva has not had a single default, lenders can provide as little as $25 to each borrower, allowing easy diversification—and the satisfaction of being involved in several people’s lives. Down the road, Kiva hopes to allow lenders to display their loan portfolios to their friends, the way people display their favorite songs or movies on such personal networking sites as Myspace.com.

The beauty of Kiva, Premal says, is that the Internet makes it so cheap to operate that it can achieve sustainability at very low operating costs—which means as soon as it achieves enough scale. Kiva could charge a small origination fee to its partners, for instance, and still be a cheap source of capital to them. It also makes a little money on the “float,” meaning the money it holds before loans are made and as repayments trickle in. Kiva keeps loan payments until the loan is repaid in full, only then passing the money along to lenders (assuming they want to be repaid); in the interim it earns interest.

Premal notes that more than 80 percent of the loans Kiva makes are rolled over into new loans when repaid, so clearly its members like what they’re doing. The fly in the ointment is that lending this way isn’t tax-deductible, the way giving to a charity would be, so Kiva hopes to launch non-refundable lending accounts, much like donor advised charitable gift trusts, to which lenders could donate money irrevocably. They’d still get to pick the people they lend to, assemble their own portfolio of loans and get updates from the entrepreneurs they fund. Only this way, Uncle Sam would pick up part of the tab.

A similarly international Internet-only newcomer is the Global Giving Foundation (www.globalgiving.com), founded by a pair of World Bank alumni to provide what it calls “an online marketplace for international giving.” From the web site, donors can give to Third World projects that have been screened for legitimacy and “support the entrepreneurial work of project leaders throughout the world, who are bringing innovative, empowering solutions to challenging social problems at the local community level.” Global Giving even lets donors set up event registries—couples about to be wed can sign up for helping the Third World poor instead of household tchotchkes from a department store.

Katrina Online
Hurricane Katrina clearly showed the power of the Internet for both good and ill in the nonprofit world. On the positive side of the ledger, donations to assist the victims of Katrina poured in, and a large proportion came in via the Internet, according to data assembled by the Chronicle of Philanthropy. Of the $34 million raised by the Humane Society in connection with Katrina, for instance, 53.8 percent was donated online. The American Red Cross received 22.3 percent of its Katrina donations online, amounting to a whopping $479 million. Smaller outfits also raised significant sums online; of the nearly $10.2 million in Katrina money raised by Mercy Corps, 45.5 percent was raised online.

The dark side of the story is that it took just hours for dubious Katrina-oriented collection sites to crop up on the World Wide Web. All told, the FBI estimated about a week after the hurricane touched down that the number of web sites claiming to offer Katrina-related information and donation opportunities stood at 2,300, making it hard for donors to know which were legitimate and which weren’t. The government inadvertently made things more complicated when the Internal Revenue Service decided to expedite the normal approval process for new nonprofits, thus facilitating the creation of some unusual charities. One tiny outfit devoted itself to supplying underwear to storm victims. Another, set up to distribute toys to children displaced by the hurricane, ended up giving the toys to needy children elsewhere because by the time it was ready to act, the Katrina victims were no longer in shelters. And the Lords of Leather Hurricane Relief Fund distributed leather jackets and other items to hurricane victims in need of fetish gear.

Some of the online charities that sprang up in the wake of Katrina were not merely quirky. Mass e-mailings—Katrina spam—also went out in search of funds or in some cases credit card numbers, and some hackers tried to propagate malicious software under the guise of Katrina relief. One scam artist created a web page in Brazil designed to look like the Red Cross site, with the goal of getting donors to input their credit card numbers and expiration dates. Other sites collecting donations failed to properly register with authorities, and one didn’t disclose its apparent links to white separatist groups. State and federal officials targeted dozens of sites for investigation. Authorities said the mad scramble for cash following Katrina was even bigger than the one that came after the giant South Asian tsunami.

Despite the potential for mischief, the Internet is only going to grow as a tool for nonprofits, as it has been doing for newcomers and long-established organizations alike. Indeed, if you want to know how important the Internet has become to a range of charities, consider the case of the National Multiple Sclerosis Society (www.nationalmssociety.org). In the long-ago year of 2001, according to the Chronicle of Philanthropy, the society raised a tidy $233,400 online. In 2005, online donations to the society amounted to $26.2 million—an increase of more than 11,000 percent.

That gain was extreme, but other charities posted large increases as well. The Chronicle tabulated results for 41 charities from 2001 to 2005 and found that in the aggregate their online fundraising grew by 1,208 percent.

Even comparing 2005 to 2004, the Chronicle found, America’s large charities posted big gains in online fundraising. The publication tracked 162 of the largest nonprofits during both years and found that online donations rose 148 percent, to $908.4 million. And remember, this is just 162 large organizations. The Chronicle said that the huge influx of online donations in response to the Indian Ocean tsunami and to Hurricane Katrina, both of which occurred within the 2005 fiscal year of many charities, account for only part of the increase.

“I would imagine that charities are just a few years behind what is happening in the rest of the online world,” says Stacy Palmer, the Chronicle’s editor, “where people get their news, entertainment, stock transactions, etc., by using the Internet. So if 50 percent of Americans do their banking online in the next decade, I would bet 50 percent will be doing their donations online a few years after that.”

Daniel Akst is a writer in New York’s Hudson Valley.