Fintech and the Giving Season

Number of the Week: 800,000 (explanation below)

Fintech and the Giving Season

It’s the time of year when a lot of people stack up their charitable donations, and seems like the right moment to look at how fintech is reshaping the world of charitable and philanthropic contributions. As with other sectors of the financial world, the charity donation is undergoing a profound transformation. In 2014, 9% of all charitable donations in the United States were made using a mobile device; in 2019, it was 26%, or nearly triple in five years, according to the Blackbaud Institute annual report on charitable giving.

Some of the organizations doing the most interesting work are for-profit, some nonprofit. This list isn’t meant to be comprehensive, and if readers like this topic, I can add other profiles in coming weeks, but here is a brief sample of how fintech is shifting the world of charitable giving.

Probably the most visible change involves bringing the world of charitable donations onto the smartphone. Many of the country’s largest nonprofits—American Cancer Society, Habitat for Humanity—have adopted the digital tools developed by Cheerful, a Denver-based fintech firm that until recently was called Bstow. Many of Cheerful’s products are upgrades of techniques that have been around for a few years (such as text-to-give donations) but among its more innovative products is Spare Change—when a consumer buys a cup of coffee in the morning using her smartphone, she is invited to round up to the next dollar and donate that amount to the chosen charity. Earlier this year, Cheerful was acquired by the DC-based GoodWorld, creating a kind of charity fintech supergroup.

Pledgeling is in a similar space; it creates plug-ins for e-commerce and Shopify that allow consumers to make charitable donations while they shop. The company claims that through its platform some 13 million meals have been provided to needy families, and 240,000 children worldwide have received educational supplies, among other admirable accomplishments.

Many individuals and small charities use crowdfunding platforms to raise money. The Australia-based Chuffed provides a one-stop shop for a huge variety of charitable causes, and it allows donors to search by category (such as “environment” and “health and medicine”) which is a great way for a charity to find new donors and vice-versa. Omaze is a variation on this idea, offering celebrity-themed contests to raise money for charitable causes.

Another approach is to change very little about how fundraisers have traditionally raised money, but just make them faster and more efficient at doing it. Gravyty is a Massachusetts-based customer relationship management that uses artificial intelligence to identify donor prospects, plan and schedule fundraising trips, and even draft e-mails to potential donors. Many charities require a “high touch” relationship with large and even mid-sized donors, and at a certain scale it becomes difficult if not impossible to maintain contact with everyone. One fundraiser at Arkansas State University told a Forbes.com columnist this month that in one year of using Gravyty’s software, he has seen a 175% increase in funded proposals (major gift requests of $25k or more); a 540% increase in dollars raised through those proposals; and a 132% increase in average gift amount.

What’s remarkable about these organizations is that none of them are even ten years old, which suggests, as with many areas of fintech, we are merely at the beginning.

The Politics of Banking Regulation

Should a bank be able to refuse to loan to a legal business because the bank doesn’t like the industry the business is in? It’s a complex question that cuts lots of ways politically and, depending on where the Biden Administration comes down on this, could represent an opportunity for commercial fintech lenders.

Understanding the opportunity requires some background explanation. On November 20, the Office of the Comptroller of Currency (OCC)—a division of Treasury that regulates national banks and savings associations—proposed a regulatory rule mandating that national banks and other lenders must provide “fair access” to capital and credit based on the risk assessment of individual companies, and not make decisions based on a business’s or organization’s category.

The proposed OCC rule seems designed to ensure that businesses can access capital even if their industry has fallen out of political favor. This is not an idle concern. For example, in recent years, activists have pressured banks to stop doing business with the companies that run private prisons, and many of the nation’s largest lenders—including JPMorgan Chase and Wells Fargo, which provided the most funding for private prisons—have cut those ties as a result. The two largest public companies in this sector, GEO Group and CoreCivic, have suffered since then (although other factors, notably COVID, are surely in play).

In general, the proposed rule—which is scheduled to go into effect January 4, after a prescribed public commentary period—is being read as pushback against the Environmental, Social and Governance (ESG) financial filter which has gained ground in recent years. This is where the politics get intertwined; in general, progressives applaud when ESG principles are used to put pressure on polluters and arms manufacturers. But to the extent that conservatives pressure banks not to fund, say, Planned Parenthood or LGBTQ organizations, the case for fair access to capital becomes a little clearer.   

Similarly, you might think that the modern Republican Party, which constantly denounces government efforts to “cram down our throats” such evils as pandemic masks and health insurance, would oppose a federal law that forces banks to lend to organizations they’d rather decline. And indeed, many of the big Wall Street banks are taking that position: this week an attorney for the lobby group Bank Policy Institute (BPI) denounced the proposed rule as “a completely unworkable government mandate designed to address a particular political problem” that would “require every covered bank to offer every financial product to every business and consumer in the country.” (BPI also asked for a longer commentary period, which might well push the rule’s implementation into the Biden Administration.)

But that’s not the line that Republicans are taking. Alaska Senator Dan Sullivan and other Republicans from oil-and-gas states have been pressuring the Trump Administration to end what they claim is unfair discrimination against energy companies. There seems to be little doubt that acting Comptroller of the Currency Brian Brooks was reacting to the Republican pressure; still, the principle behind his proposed rule is very consistent with the public stances that federal regulators have taken at least as far back as 2015. The Obama Administration made a lot of people angry with Operation Choke Point, a Justice Department initiative to cut off financial services to several sketchy, but usually legal, industries (payday loans, get-rich-quick schemes); when the administration retreated, it asserted the “fair access” principle, which after all is baked into Dodd-Frank.

This week, Trump formally nominated Brooks to be Comptroller, and Senate Republicans are trying to fast-track Brooks’s confirmation; if he is approved, it puts Biden and his future Treasury Secretary in the awkward position of having to fire him. According to Bloomberg, that has never happened before (although it does seem like a change in President has often corresponded with the Comptroller resigning).

And that is where fintech comes in. There is a whole monograph to be written on the question of whether OCC rules apply to fintech lenders. A quick answer is, generally speaking, they don’t; and in this particular instance, the rule definitely does not apply to most fintech companies. That’s because the proposed rule only covers banks with $100 billion or more in assets (see page 12), which is far larger than most fintech lenders.

This seems like a double-edged advantage for fintechs. If the rule takes effect and isn’t removed by Biden’s OCC, fintech companies won’t be punished for any calls they make about higher-risk lending. If the rule doesn’t take effect, and it gets harder for a variety of industries to secure financing, this represents a strong market opportunity for commercial fintech lenders. It might seem strange to think of, say, a public company such as the GEO Group getting a line of credit from the likes of BlueVine. And yes, most fintech lenders are probably too small to handle big corporate accounts. But as both the ESG movement and the fintech industry grow, this seems the direction we’re headed in.

FINvestments

🦈Number of the Week: I told FIN readers three weeks ago to keep an eye on the UK challenger bank Starling, and sure enough, this week Starling said that in the month of October, it made a profit of 800,000 pounds, or a little over one million dollars. It’s the first UK challenger bank to make a profit; founder Anne Boden explains her mission here.

🦈Despite the Thanksgiving holiday, it was a big week for insurtech. Hippo got a $350 million investment, and Metromile will go public via a SPAC at a valuation of $1.3 billion.