Dwolla - new competitor to Paypal and Credit Cards - Anyone Using?

[Sinecure]

Just saw a discussion about this new company on another forum. I like the idea. As the recipient of money you pay a flat $0.25 transaction fee, regardless of the amount of the transfer.

Article about them from yesterday's SF Chronicle HERE.

This 28-Year-Old Is Making Sure Credit Cards Won't Exist In The Next Few Years
Alyson Shontell, provided by
Business Insider



There's a tiny 12-person startup churning out of Des Moines, Iowa that most people have never heard of.

Dwolla was founded by 28-year-old Ben Milne, and it's an innovative new way of thinking about online payments that sidesteps credit cards completely.

Milne has no finance background, yet his little operation is moving between $30 and $50 million per month, or about $350 million per year.

We interviewed Milne about how he is building a credit card killer and Square rival from the middle of the nation where VCs and press are scarce.

I'm told you're pissing off credit card companies. How are you doing that?

Ultimately we're trying to build the next Visa, not the next PayPal. We're building a human network based on how we think the future of payments will work. The current model needs to be blown up.

Dwolla started out of my old company. I owned a speaker manufacturing company and we sold everything directly through a website. I got really obsessed with interchange fees and how not to pay them. Every time a merchant gets paid with a credit card, they have to give up a percentage. In my case, I was losing $55,000 a year to credit card companies. I felt like they were stealing from me -- I was getting paid and somebody was taking money out of my pocket.

So I thought, how do I get paid through a website without paying credit card fees? We pitched a bank, and amazingly enough they said, "We'll give it a shot."

That was three years ago, so we've been working on the project for a really long time. In December of last year we figured out how to legally do what we do.

How many transactions are you doing?

The average transaction volume for Dwolla is right around $500 dollars. We move between $30 and $50 million per month

What's your story?

I'm 28. I started my first company, Elemental Design, when I was 18. I dropped out of University of Iowa and built that.

I started college because I thought that's where I was supposed to go. I applied to one college, I got in, went, and realized it wasn't for me. I had customers so I stopped going to class.

We grew that company from a $1200 investment to over a million in revenue in 4 years with 3 or 4 people without outside investment. We were doing a million and a half a year and the company was running itself; I wanted to work on another project.

You don't have a finance background and yet you built Dwolla?

It's been helpful in some strange ways. I think the first financial institution we went in to only listened to me for entertainment. They let me get in and pitch the full executive team at the bank.

I don't look like a banker, they knew I didn't have a banking background. They actually agreed to work with Dwolla after two hours of arguing with me and me scribbling on a whiteboard about how the whole thing could work.

Had I been more typical, maybe they wouldn't have listened to me. In that respect, I think that probably not knowing how the mechanics work is good -- we just know the way we want them to work.

What did you do for the first two years when it wasn't technically legal?

For the first two years we built out the platform. We did a sh*tload of testing and did it small scale because legally we couldn't do it nationwide. We spent two years inside of Iowa fine-tuning Dwolla with the financial institutions, building out some of the initial models, and trying to figure out how to legally do what we do.

How'd you find a legal loophole?

Moving money is an exceptionally regulated business. We're in Iowa, which is sort of conservative -- I don't know if that helped us or hurt us, but long term I think it helped us. We figured to do this legally, we had two options: We could take in a tremendous amount of money and go out and get licenses, which is how most people do it. But we didn't have access to that kind of capital here. The other option was to bring in really strategic investors, which is what we did. One is a financial institution, one is a financial services company.

quote dwollaOur investors do credit and debit processing for banks. So when you get a credit card from your bank, it's being issued by companies like this. Our investors are also distributing our product to financial institutions. So we've been building a network, and we can do it legally because of who our investors are.

We launched in December of last year and started moving $50,000 a week. Now we're hovering around $1 million a day now. We hit that milestone in June or July. Now we've quieted things down. We had to tap the breaks because the way you handle money needs to be managed correctly. We have some new partners on board and we're going to hit it hard in December again. We've got some stuff coming out in December that we think should be really big.

How does Dwolla work and how is it different than PayPal?

With Dwolla, payments are made directly from your bank account. No credit or debit cards are allowed. And because they don't exist in the system, we don't have to bring the fees into the system.

You can spend any amount of money and when you do that, the person on the other end doesn't have to pay 1, 2, 3 or 4%. They only pay $0.25 a transaction, which is especially helpful when it's $1,000, $2,000 or $5,000 transactions. Obviously PayPal becomes very cost prohibitive with those larger transactions.

The biggest difference between ideas like this and a PayPal -- and PayPal is a phenomenal idea, Square is too -- is that those are built on top of networks like Visa and Mastercard. We're building our own.

dwollaCan users only send money to Dwolla members?

No, you can send money to anyone. Only the person sending it has to have a Dwolla account to initiate the transaction. The person receiving it will have to sign up for an account, but we've been surprised at the conversion there. It's worked relatively well. We leverage social networks really heavily as contact lists, which is one thing we do really different. You can send money with an email address or with a phone number, but the most popular way to do it is to connect to Facebook and type in a friends name.

We think, in the long term, sending money should be as easy and effortless as finding a friend on Facebook. That's really a behavior we try to mimic when it comes to peer to peer payments. When someone does not have a Dwolla account, they get a wall post that says, "You've got money." If a friend sent that to you and it was their name and their face, you would have a different emotional connection to that than an arbitrary email from hellokitten32@aol.com. It's a totally different interaction and one that's been really helpful for us in converting users into the system.

What kind of purchases and money transfers are Dwolla being used for?

We do pretty well in B2B; 11% of our business is person to person, and the large majority is business to business, consumer to business, and business to consumer. The platform was originally built for taking in payments through websites, and we have APIs that allow you to do that. We haven't experienced the scale on those quite yet.

Where we've seen a ton of transactions right now is with people paying monthly rent. If I'm a landlord and I want to collect it, taking a credit card payment means missing out on 3% of a $1800 charge. Dwolla is $0.25 cents.

The average Dwolla transaction is right around $500. PayPal takes 2.9% plus $.30 a transaction.

Ran out of room. Quote/article continued in next post.

[Sinecure]

Continuation of article...

Why hasn't anyone side stepped the credit card companies before?

I think a lot of it is timing and luck. And a little bit of getting your foot in the door. One of our investors is a $1.8 billion financial institution. That's atypical anywhere, let alone in Iowa. Having them on board allowed us to get into a lot of rooms.

We serve everyone from the landlord taking in one payment to the individual buying a coffee with their cellphone, to billion-dollar corporations. Because we're so atypical and look at mobile payments differently, we got in the room with the Federal Reserve and the US Treasury who allowed us to have a conversation, not only from a corporate standpoint, but from a government monetary distribution standpoint.

All banks are connected by one APH system. Credit card companies utilize that same system to pay off your credit card charges. Banks internally set along that same system to move money in their own banks. This system in it's own right is riddled with flaws -- tons of fraud issues and waste and delays. If you've ever had a payment take a few days to clear, its because they're waiting on that APH system.

We want to fix that system between the banks, take out the delays and make it instant. If we can create this ubiquitous cash layer of distribution between consumers and merchants and developers and financial institutions, that actually fixes the problem.

No one has built a payment network in 30 years -- since credit cards. Everybody has concentrated on how we build a portal for credit cards, from digital wallets to Square.

We don't believe in credit cards. We believe in authorization and in lower cost transfers. Our generation actually understands that when you buy sh*t, it comes out of your bank account and you have to pay for that.

Since you're hooked up to bank accounts, users don't have to have money in a Dwolla account to make a transfer?

You can hold money inside of Dwolla but you don't have to. We're finding a lot of consumers want to hold it there. There is actually a positive average balance inside of Dwolla for each consumer. We also have businesses that use Dwolla to do payroll, so they'll keep a balance in there to cover the cost.

You could have an account of $0 in Dwolla and their would be no fee?

The only fee would be if someone paid you. We take a quarter. We really want that quarter. It's all we want!

How do Dwolla's mobile payments work?

We built out mobile facing system; your mobile phone is just a different view of a website, so a mobile payment is just an authorization on your cell phone.

We take the website, plop it into the cell phone, start adding proximity solutions so you can to see what Dwolla merchants are close to you, and then make it easy to pay once you go into a store that accepts our system. Dwolla uses the GPS feature and allows you to make a payment in real-time.

So you're saying if a Starbucks accepts Dwolla I'll be able to see that on a Google Map, go there and charge the coffee to my phone?

Yes, you'll just walk into the store and pay. It's like checking in on Foursquare, you're just paying instead of checking in.

We started in one coffee shop and now we're working with 400 or 500 merchants. Part of us scaling out is we have to pick inflection points and then do some hiring to actively pursue those communities and integrate with them. We'll be beginning that in December.

Do banks have to pay to be integrated with Dwolla?

No, we just give them the service and then your bank account comes with Dwolla. There are 16 banks across the country that come with Dwolla. We're talking to some huge financial institutions about doing the same thing.

Banks are going to have trouble being relevant in mobile. The fundamental issue with mobile payments is: how do you get to your cash regardless of where you bank? No one has cracked that nut. I truly feel like we've not only cracked that nut but we're already selling it into financial institutions.

You don't have to pay the banks anything to log in and access accounts?

Nope. We built a web service that connect with the financial institutions and we do not have to pay them to work with them. We're a service provider to them and we work at the same time to make their customers happy.



Who are your investors?

We've raised $1.3 million.

You ever hear of John Deere Tractor? They have a bank, Verdian Credit Union, but essentially it's John Deere's bank, Verthian Credit Union. Verthian is one of our primary investors. The other investor is a company called The Members Booth which provides credit, debit, and security solutions to banks and credit unions.

How big is the Dwolla team?

We're about 12 people -- that's a beast of a startup in Iowa. We were smaller last December, about 2 or 3 people, so we've had pretty good growth. Most everyone is in Des Moines.

We've experienced strong early stage validation and have generated revenue that says "Hey, this thing can work well." We've got this little fire and now we're trying to figure out how to pour a sh*tload of gas on it, and really make this scale out. The beginning of that is in December and right now we're trying to ensure we have the right partners to really kick that thing off really hard.

What happens in December?

Oh, it's going to be good.

What is it?

We've got this product coming out in December that solves a whole bunch of really big problems inside of the ACH system, which all banks are connected to, and it does it in a way that's never been done before.

Are you raising capital?

We have a lot of really positive conversations going on at the moment and we're trying to figure out who the right partner to work with is. We're fortunate that our current investors are very supportive of what we're doing.

How are you doing all this from Iowa? It seems like this company should be on Wall Street.

Maybe. Right now Des Moines is the right place for us to be. In the future there's going to have to be a lot of business development outside of Des Moines and there are some things we won't be able to do from here.

If we can convince people in Iowa, who are more conservative by nature, to use Dwolla then my personal feeling is we've really got something there. Had we been outside of Iowa, maybe we would have tried to scale things up too quickly and maybe it would have blown up in our faces. Maybe not.

In my own naive way, I would never build a company anywhere but Iowa so maybe I just don't know any better. My personal feeling is, if you want to build it, where you are is just an excuse. Figure out ahat the area has to offer you and then leverage that. Hustle your ass off and make it work.

[arild]

Cool idea. We have something similar in Norway, called Bank ID, which uses your Visa for identification, then pushing in codes, and withdraw directly from the bank account. The card is only there for the actual identity control, and you pay no fees, other than the banks´. This is only for online payment, though.

Something like Dwolla could definitely work over here. Would be nice circumventing the whole VISA/MC shit altogether.

[bushman]

This kid is gunna be wealthy, unless he has a "accident".

[StopMakingSense]

I'm signing up now and will require it for my transactions now on TGR

I fucking hate PayPal

[systemoverblow'd]

So $30M per month in transfers with an average of $500 per transaction. That is 60,000 transaction based on the $500 average. That equals $15K per month. Not really a huge business at this point but I like the idea. Of course with the average I assume there are a lot more smaller transactions so the number I think would be well north of 60,000. I would assume it maybe brings in $20K+/month? Or maybe my math is completely fucked.

[jerr]

^^That's what I got too. $50m/mth = $25 000. But I think even this system will be redundant pretty soon.

In NZ if you sell something you just give the purchaser your bank account details and they direct debit the money from their account to yours. The next morning it's there. On my account, which is very standard it costs me nothing to send or receive.

Most utilities + a whole bunch of other institutions & gov stuff, and increasing on-line retailers, are either registered with all of the banks or will provide you with their bank account details. To pay someone you log into your banking account and fire them the money in a 'one-off-payment'. Reference numbers relate the purchase to the amount coming into the receiving account.

No fees, no credit cards, no third party, just your bank account and theirs - for, increasingly, all transactions.

Am I explaining something you already have? I'm guessing this isn't how things are in the US?

[arild]

^^That's what I got too. $50m/mth = $25 000. But I think even this system will be redundant pretty soon.

In NZ if you sell something you just give the purchaser your bank account details and they direct debit the money from their account to yours. The next morning it's there. On my account, which is very standard it costs me nothing to send or receive.

Most utilities + a whole bunch of other institutions & gov stuff, and increasing on-line retailers, are either registered with all of the banks or will provide you with their bank account details. To pay someone you log into your banking account and fire them the money in a 'one-off-payment'. Reference numbers relate the purchase to the amount coming into the receiving account.

No fees, no credit cards, no third party, just your bank account and theirs - for, increasingly, all transactions.

Am I explaining something you already have? I'm guessing this isn't how things are in the US?

This is the gear swapping method of Norway, too. The Bank ID stuff is only when dealing with commercial actors.

[weasel1]

We're looking at this too... fees are a real drag on our low-overhead business model.

[HansJob]

I bought a bunch of sound dampening material from this guy a couple years ago. He was really cool to talk to/work with on vibration reduction issues in my vanagon. Good for him! I always thought it was kinda fucked up that the big players got so much from merchants.

[StopMakingSense]

Now only if this could be done internationally...

"At this time, Dwolla is only available for use within the United States. Expansion of our services to non – US customer’s, has not yet been established. Dwolla’s, presence in the future is to be – ‘Here, There and Everywhere’. Please continue to watch us, as we grow with you and for you, THE CUSTOMER. Thank You for your inquiry."

[Mustonen]

^^That's what I got too. $50m/mth = $25 000. But I think even this system will be redundant pretty soon.

In NZ if you sell something you just give the purchaser your bank account details and they direct debit the money from their account to yours. The next morning it's there. On my account, which is very standard it costs me nothing to send or receive.

Most utilities + a whole bunch of other institutions & gov stuff, and increasing on-line retailers, are either registered with all of the banks or will provide you with their bank account details. To pay someone you log into your banking account and fire them the money in a 'one-off-payment'. Reference numbers relate the purchase to the amount coming into the receiving account.

No fees, no credit cards, no third party, just your bank account and theirs - for, increasingly, all transactions.

Am I explaining something you already have? I'm guessing this isn't how things are in the US?

That's the ACH network. We have that. We don't use it very well, though.

Our electronic payments systems are hopelessly out of date, but with all of the turmoil in the financial services industry, and the key players mostly dedicated to maintaining the status quo, I don't see a comprehensive overhaul anytime soon. Ideas like Dwolla are a dime a dozen, and they're pretty small potatoes.

[Mustonen]

Of course with the average I assume there are a lot more smaller transactions so the number I think would be well north of 60,000. I would assume it maybe brings in $20K+/month? Or maybe my math is completely fucked.

Math fail. You were doing so well, too....

I don't know what this APH system is the article is talking about. I'm assuming they mean ACH.... Editor fail.

[DHogg]

^^That's what I got too. $50m/mth = $25 000. But I think even this system will be redundant pretty soon.

In NZ if you sell something you just give the purchaser your bank account details and they direct debit the money from their account to yours. The next morning it's there. On my account, which is very standard it costs me nothing to send or receive.

Most utilities + a whole bunch of other institutions & gov stuff, and increasing on-line retailers, are either registered with all of the banks or will provide you with their bank account details. To pay someone you log into your banking account and fire them the money in a 'one-off-payment'. Reference numbers relate the purchase to the amount coming into the receiving account.

No fees, no credit cards, no third party, just your bank account and theirs - for, increasingly, all transactions.

Am I explaining something you already have? I'm guessing this isn't how things are in the US?

When I was in the USA I was pretty shocked at how difficult they make doing a simple bank payment. Not nearly as easy as over here, which is why I imagine it is not very common.

[weasel1]

Signed up. We'll see how it goes, but makes a lot more sense to me than paying CC fees.

[systemoverblow'd]

Math fail. You were doing so well, too....

I was just about to come back with an example of why I was right and then slapped my head and realized how I was wrong.

[Hugh Conway]

When I was in the USA I was pretty shocked at how difficult they make doing a simple bank payment. Not nearly as easy as over here, which is why I imagine it is not very common.

It's also the fees in the US. Anywhere between $10-40 per transfer transaction. WAMU (my bank before they went tits up) had free wire transfers but you had to go to the bank, fill out the form, and wait for the idiots to figure out what to do. Course now it's a pita and not free. Also remember US banks are incompetent shysters who don't give a shit about card fraud, unlike other banks in the world


Square.com is a decent payment service.

[StopMakingSense]

It's also the fees in the US. Anywhere between $10-40 per transfer transaction. WAMU (my bank before they went tits up) had free wire transfers but you had to go to the bank, fill out the form, and wait for the idiots to figure out what to do. Course now it's a pita and not free. Also remember US banks are incompetent shysters who don't give a shit about card fraud, unlike other banks in the world


Square.com is a decent payment service.

Albeit it still takes a % ... I use it in the summer when I do contract work. It helps a lot and I can even provide a receipt for business travelers.

[RShea]

Math fail. You were doing so well, too....

I don't know what this APH system is the article is talking about. I'm assuming they mean ACH.... Editor fail.

APH- Automated Payment Handling instead of ACH...???

[splat]

With such a number of these payments programs sprouting up, one has to wonder how secure the googlerithms within them are and if there is a standard interwebz security protocol that has to be followed. Or, is Mrs. Hansen's 10th grade savant computer class lurking to take control of major financial markets?

[whyturn]

^^^because major cards computers are so secure

[NatEE]

With such a number of these payments programs sprouting up, one has to wonder how secure the googlerithms within them are and if there is a standard interwebz security protocol that has to be followed. Or, is Mrs. Hansen's 10th grade savant computer class lurking to take control of major financial markets?

Here's their answer to that. In general though, most financial institutions are fairly good... If you use the same user/pass someplace else, say like an online forum, you might be in trouble since those databases seem to be getting hacked left and right these days.

Granted, anyone can get hacked at this point, I believe my CC # got pilfered out of an online database about 2-3 years ago. At least there was a suspicious "test" style charge on it after one of the big payment processors got hacked and a couple million numbers got out. That said, the fraud buffer you get with a CC is one of the really nice aspects of it.

[theetruscan]

With such a number of these payments programs sprouting up, one has to wonder how secure the googlerithms within them are and if there is a standard interwebz security protocol that has to be followed. Or, is Mrs. Hansen's 10th grade savant computer class lurking to take control of major financial markets?

Standard practice for banks is to use protocols that meet certain standards. Standard practice for these startups is to use most of the same protocols, with the same guarantees. How soundly they use these protocols is a constant point of interest.

[vulture]

No fees, no credit cards, no third party, just your bank account and theirs - for, increasingly, all transactions.

Am I explaining something you already have? I'm guessing this isn't how things are in the US?

We can do direct wire transfers from one bank account to another, but the fees are quite high. At some banks the fees are reduced if you have a large account balance. I wish it were easier!

[splat]

http://www.nytimes.com/2012/02/25/yo...ref=technology