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Dwolla Debut

Money-saving platform is shaking up the way we pay


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A small startup in Iowa is creating big waves in the payments industry. Dwolla (dwolla.com) is just three years old, but it has created a disruptive platform that has captured the interest of merchants, consumers and investors.

Dwolla offers a cheaper alternative to the existing credit-card networks and mobile payment systems. Transactions under $10 are free to both parties. And transactions over $10 cost just 25 cents—that’s it, a quarter whether it is $20 or $2,000. No other fees or percentages. With credit cards, current charges range from 2 percent or more plus a small amount per transaction, totaling nearly $50 billion in fees last year. It’s pretty clear why this would seem attractive to retailers, especially smaller ones and those with many small transactions.

This new system supports retail locations, online commerce and mobile payments. They have a smartphone app that tells you when Dwolla merchants are nearby and handles the payment transaction in the store. Merchants can begin accepting payments without adding extra equipment. A popular and rapidly growing segment is peer-to-peer payments, where you can easily pay your buddy back for lunch or the bet you lost on your fantasy sports team. All you have to do is click on the name in your address book and put in the amount to send.

Dwolla does this through its own network, which bypasses the traditional credit-card system. Their approach works through the ACH system providing users access directly to the cash in their checking accounts. Although many observers were doubtful early on, Dwolla has reached a daily transaction volume of more than $1 million faster than their more well-known competitor Square. They have about 100,000 registered users and 8,000 merchants signed up. They project to reach a billion-dollar annual rate of transaction flow this year.

Dwolla claims its approach is more secure than credit cards and also doesn’t require PCI compliance. The founder says they designed the system so no critical personal information is left behind. But color me a little skeptical on security. While I see the merit in their argument about not using or storing card info, it still has to be replaced by something else, and that seems to be passwords and pincodes. And we know how well those work to protect you.  So I will wait awhile before I connect Dwolla to my bank account. At least with credit cards there are regulations limiting any loss to me.  

Also, I have to wonder about their business model. If you assume a relatively small average transaction size of $50 and that half of their overall transactions are under $10 with no fees, then their gross revenue would run $2.5 million on $1 billion annually in total flow. My guess is that supports maybe 20 employees  and expenses. If the average transaction is $100, then cut the revenue in half. However, venture investors saw reason to put in over $5 million in funding recently, so they see some exit. My guess is they’re hoping for an acquisition by someone like Google or PayPal.  

The main problem I see is that Dwolla is treading directly on the turf of the banks as well as the credit-card industry. Either or both could respond if they have the vision. Dwolla may be the innovator and demonstrate there’s a market.  But being first to market isn’t always a good thing; remember Friendster or Six Degrees? Maybe not—but they were online social networks before Facebook.
Credit cards and mobile payments are ripe for innovation and many traditional players are plotting their strategies. But the wireless carriers and big internet enterprises are looking also. Whatever the outcome, it’s likely to be good for both merchants and consumers.

Roman Lubynsky is a technology consultant based in Boston. He can be reached at roman@lubynsky.com. 

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