New Donor-Advised Fund Tech Raises Old Concerns

Within the space of a week, I received three items regarding an emerging payment processing firm called Chariot:

•  A report from Chariot purporting to show dramatic new data about how much donor-advised funds (DAFs) boost fundraising;
•  An announcement of a Giving Tuesday-like event called DAF Day, “powered” by Chariot; and
•  An alarming release from a law firm warning nonprofit clients that Chariot may be scraping its donor and client information, and providing that data to third parties without express consent from DAF sponsors or donors. (Editor’s note: The law firm, Holland & Knight, has since removed this release from their website with no explanation. They have not responded to requests for comment.)

First, about the report: 

The underlying data is not public, so it’s impossible to verify its findings, which are based on a very limited number of organizations (20). Like so many industry-sponsored studies, the report makes claims that sound highly suspect — for example, that “once someone starts giving from their DAF their annual giving increases by 96 percent.”

The most likely reason for such behavior is not that DAFs possess some magical quality that dramatically juices up giving, but a more mundane one: DAFs are chosen primarily by wealthy donors, and are relentlessly marketed by wealth managers to their clients as a tax-avoidance strategy. These savvy donors use DAFs to reduce their taxes in response to “wealth events” (which increase their giving potential) and often “bunch” donations, which allows them to itemize charitable deductions on their tax returns.

DAFs are perfect for bunching because, as a popular personal finance magazine notes, they allow donors to take a deduction immediately while postponing decisions about where to give. “Charitable bunching doesn’t mean you have to rush to decide on how to distribute your funds.”

And the warning about data-scraping?

Alongside our other concerns about the virtually unregulated nature of the burgeoning DAF industry, this suggests another, almost entirely unexamined aspect of the DAF explosion: the proliferation of for-profit companies promoting a range of new apps and platforms that profess to make DAF giving more bountiful and efficient (“frictionless,” in their lingo).

At a time when individual giving has been flat or declining, it’s no wonder that such products can  be attractive to donors and nonprofits alike. And this makes it even more vital that reporters, the public, and the industry itself understand the potential harms that may lie  behind technological “innovations.” We need to ask questions like:

• What is the fee structure of these products? What costs do they impose on nonprofits, DAF sponsors, and donors beyond the existing payment processing fees already imposed by credit card companies, or investment and administrative fees? Do those costs outweigh the benefits? (Editor’s note: Chariot reports charging “a standard processing fee of 2.9 percent that is in-line with credit card processing,” paid by the nonprofit, or a subscription fee to then waive processing costs.)
• To what degree are donors, nonprofits, and sponsors effectively signing away privacy and protections against sale of data to outside vendors? We know all too well that tech products offered at seemingly zero or minimum cost ultimately monetize users’ eyeballs and information in opaque ways. (Editor’s note: Chariot asserts that they do not “sell or share a donor’s account credentials, account balance, previous grant recommendations and amounts, total funds associated with the account, or investment profile with customers or third parties.”)

Such questions are critical, since we’ve already seen how the entry of major payment processors into the field has proved to be problematic. In 2020, for example, attorneys general from 23 states won a settlement from PayPal Charitable Giving Fund — a DAF sponsor that processes crowdfunding donations — after an investigation found that PayPal had redirected donors’ contributions from their selected charities to other organizations with similar purposes without informing donors.

Chariot is among a new batch of DAF-focused startups — Axios recently reported that Seattle-based venture capital firm Maveron led Chariot’s Series A fundraising of $11 million.

The young company lets charities add a DAF option to their donation forms, so donors can choose to give directly online from those charities’ websites, instead of having to go through the DAF sponsor. Having to take that extra step, says Chariot’s Head of Strategy, “introduces an outrageous amount of friction in the user experience that limits or prevents donation volume, significantly delays proper stewardship and adds operational burden to overworked nonprofit staff.”

Leaving aside any debate about whether an extra couple of clicks constitutes “an outrageous amount of friction,” it’s hard to understand how taking the sponsors out of the picture ensures “proper stewardship.” They are, after all, the legal owners of the DAF accounts, from which the donors “recommend” grants. 

It makes sense that DAF donors and nonprofits would see value in tools like Chariot. And it makes sense that venture capitalists and the financial industry do, too. It’s more important than ever that we look beyond press materials, and make sure that innovations aren’t just new ways to skim off some profit, but deliver tangible benefits to the charitable sector.