Can buy now/pay later help charities?

Buy now/pay later lending is normally associated with the point-of-sale loans that consumers use to finance large purchases, though a startup contends the idea can also be deployed in other ways, such as boosting funding for nonprofits.  

"The problem that nonprofits have is liquidity," said Dominic Kalms, founder of the fintech, B Generous, which uses a model similar to BNPL lending to enable consumers to make larger donations in installments. 

Nonprofits can then use those larger donations to manage their balance sheets at times of the year when donation volume is lower. "There's usually enough money for the nonprofits, but most of it comes in the last three months of the year," Kalms said. 

B Generous calls its product "donate now/pay later." It pays a nonprofit upfront, with the donor paying the amount of the donation in installments, usually between six and nine months. The first loans will go out this week as part of a pilot, which should reveal the utility of the BNPL model outside of e-commerce or in-store retail at a time when installment lending is under regulatory scrutiny and installment lenders face economic pressure. 

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August 25

It's an environment that has BNPL firms looking for other use cases, such as business credit. And nonprofit organizations are often early adopters of new payment technology, such as using digital assets to fund hospitals and adopting cashless options to help the homeless. 

"Anything that helps increase levels of money donated probably ought to be a good thing," said Gareth Lodge, a senior analyst at Celent. The B Generous concept may increase the amount of donations if not necessarily the frequency, Lodge said. 

B Generous has been working on the underlying technology for about two years, and is partnering with Drake Bank in St. Paul, Minnesota, which is managing the underlying loans. The donate now/pay later feature will appear as a button on nonprofit websites. 

The $250 million-asset Drake and the fintech will split the maintenance fees charged to the nonprofit. Donors will be given the option to help pay for the maintenance fees, and all of the donors' pledged donation amounts will go to the nonprofit, as the loans do not have fees or interest. The maintenance cost varies, and B Generous estimates the rate will be about 10% in most cases.

"This is a good example of a fintech working with a bank," said Nichol Dehmer, co-chair of the board at Drake Bank. The bank is looking for fintech partnerships and chose B Generous because the nonprofit model lends to forging connections with specific communities, Dehmer said. "And in this competitive landscape, community banks are going to need partners to reach new markets," she said.

The market for donations is large but skews toward individual giving. Total charitable giving in the U.S. in 2021 was $484 billion, up from $466 billion in 2020, according to Byrne & Pelofsky, a consultancy serving nonprofits. Sixty-seven percent of those donations came from individuals, as opposed to foundations or grants. "Mega gifts" of more than $1 million from wealthy donors were only 5% of the overall total.

There are financial challenges for both parties in a charity payment.  The first is the seasonality of donations. Thirty-one percent of charitable donations come in December, reports Neonone, a research firm, and 12% comes in the last three days of the year, it says. That creates a cash-flow imbalance for many charities. Only 25% of nonprofits have more than six months of cash on hand, according to the Council of Nonprofits.

The second challenge is available funds for the smaller individual donors who dominate charitable giving. Seventy-two percent of these donors would give more if their finances allowed, according to FidelityCharitable.org. In B Generous's own research of about 1,000 donors, 82% said they would double the amount of their donations if they could manage the near-term financial hit. 

"It illustrates how the installment concept can transcend many verticals," said Brian Riley, director of Mercator Advisory Group's credit advisory service.

One area of concern for nonprofits is efficiency ratings, or the amount of the nonprofit's resources that goes toward funding its mission rather than management, Riley said. "If B Generous can get its hands around that part of the model, it might have an interesting offering to the nonprofit community," Riley said.

B Generous's site says loan decisioning is based partly on a soft credit pull, which generally does not impact a consumer's credit score, though the website also says staying current with the donate now/pay later plan can build or increase a credit score, as Drake reports the loans to credit bureaus. 

Experian and TransUnion earlier in 2022 began incorporating BNPL lending into credit reports. Writing for American Banker, Liz Pagel, senior vice president of consumer lending for TransUnion, said BNPL lending can help consumers demonstrate creditworthiness by paying off the loan quickly. 

But there is also a counterargument, said Lodge, that centers on the use of the BNPL model in the current troubled environment for installments.  

"There is a definite camp that thinks BNPL is not necessarily a good thing for the consumer, with a feeling that it is sometimes a little too easy to get credit, and consumers often lack an understanding of the implications and affordability," Lodge said. "Even if there is a safeguard in place, I do wonder if some nonprofits may feel a little uncomfortable using something that may, rightly or wrongly, in their minds be associated with BNPL."