Following the Kids Company fiasco, what does alternative finance such as peer-to-peer and crowdfunding offer charities?

What's the connection between charities and alternative finance? Currently, the answer is not a lot – charities are often big, well-oiled machines, and peer-to-peer lending and crowdfunding platforms are still very new. But do the latter offer the former something?

 

The ongoing Kids Company fiasco has put the charity model under scrutiny. And the use of cold calling has already raised serious questions about charities’ fundraising practices. So I ask two questions: one, what could alternative finance offer extant charities; and two, what could alternative finance mean for the charity model and future of the sector? 

Fundraising is the obvious overlap. “The old fundraising models have become tired,” says Mark Salway, director of social finance and social impact investing at Cass Business School. He’s optimistic that even large charities will soon choose to innovate with fundraising methods, and crowdfunding seems an obvious way forward – particularly for raising money for a specific campaign.

 

That said, Imran Gulamhuseinwala, partner at EY and leader of the firm’s fintech practice, highlights that a fundamental element of crowdfunding is to make high levels of engagement the norm. And this is at odds with the direct debit collection which forms a stream of a charity’s fundraising operations. “For charities to properly adopt an engagement model is quite a sea change. Arguably, some fundraising is quite light-touch compared to the engagement generated by crowdfunding platforms,” he says. Dan Corry, chief executive of New Philanthropy Capital, points out that, for many, giving is about hearing as little as possible from the charity afterwards. “Ask people how much they’d give if they were just left alone, and they do say more. A sensible charity will always use different options, and crowdfunding technology should be seen as an option.” 

 

It’s also worth considering the innovations charities are already making, and how they could be supported by P2P technology. Partnerships with alternative finance providers could see advanced versions of the platforms individuals use to raise money for charities (think JustGiving) becoming more commonplace. And social impact bonds (which are more popular in the UK than anywhere else in the world) could be issued from extant crowdfunding platforms. 

The potential for a shift towards lending to charities (rather than just donating) is enormous. Salway believes that it is investment, underpinned by technology, which will win out over giving in the long term. “People are realising that grants and the hand-out culture where recipients are reliant on an income stream is not sustainable, and they want to see their money being put to work.” 

 

There are some sector leaders here. Salway used to be director of finance and operational support at Care International UK. Care is one of the world’s largest NGOs, and in 2010, it launched a microfinance platform, Lendwithcare. Inspired by US non-profit Kiva, which effectively crowdfunds loans to entrepreneurs in the developing world, it issues interest-free loans in emerging markets. 

 

This shift towards investment is happening alongside greater donor/investor interest in outcomes, with numerous charities and other third sector organisations closely assessing financial return against social impact – and informing investors. Salway foresees the crowdfunding model moving this on further: “the conversations are not well formed yet, but crowdfunding makes it simple for someone to tell a story. You don’t need a complicated measure of impact in the same way.” Again, it comes back to engagement: crowdfunding platforms have done a lot in a short space of time to keep momentum among investors; loan-based charity could learn from that.

But does the rise of P2P and crowdfunding signal a far more radical shift in how we understand philanthropy? Charities are defined by the state and must comply with its rules and regulations. Alternative finance and surrounding revolutions – microfinance, virtual currencies – offer almost unlimited ideas for future models. It’s not difficult to imagine a crowdfunded regional pensions fund, or a peer-to-peer alternative to welfare payments. Further from home, we’ve already got the likes of Kiva and Give Directly, which uses mobile payments from the West to advance micro-donations direct to poor people in Kenya and Uganda. Last month, Ogilvy marketing legend Rory Sutherland wrote a piece for the Spectator entitled “A better way to be charitable: just give money”. He uses the two non-profits to make the following point: direct cash transfers are a viable way to give to others. He writes: “there is very little opportunity to game the system – because there is not much system to game. Moreover, all the research shows that for years after people receive this year-long influx of funds, they earn more, own more, work more and are substantially happier.”

 

But there are obvious caveats. First, would donors be as willing to give meaningful sums of money to people in the UK as in Africa? And second, charities and their operations are not all about money. “You can’t just say to someone with mental health issues or a lonely older person, ‘here’s some money’”, points out Corry. Carving out the middleman can lead to increased efficiencies and more money reaching the intended recipient, but “a lot of what the charity sector does is far more complicated than that”. 

 

Corry thinks we’ll see the greatest  adoption of alternative finance models where charities are moving into areas which used to see government provision. But further than that? “Bitcoin is interesting. But does it mean we’re going to see a cashless world in my lifetime? I don’t think so. Crowdfunding is important, and I’m not saying this is a good thing, but I’d be surprised if the charity sector will look massively different in 20 years’ time.”

 

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