NICHE:

Dwolla is a “cash based payment network” launched in 2009 by co-founders Ben Milne and Shane Neuerburg. Initially starting small, the company connected just a few banks and retailers in Des Moines, Iowa. It has since grown to a company used by over 80,000 users, 7,500 merchants, and banks across the U.S. Dwolla believes that rather than rely on existing land based credit card networks – which take an average of 2-5% per transaction – consumers should instead use internet as a means to transfer money quickly, cheaply and more securely than cash.

Though the company hopes to become an eventual replacement for credit cards, some of its current uses – fueled by the young and tech-savvy generation it rose from – might position Dwolla to become much more. For instance, its aptitude for transferring small amounts of  money to peers and large amounts of money to landlords represent a domain that credit card companies have yet been able to touch. Additionally, one of Dwolla’s new services allows users to pay up to 2,000 others at once. This opens the door for small and medium companies to potentially redesign the way they do payroll. Today, the company has approximately 40 employees.

CEME Presents: Dwolla, part of the ABCs of Payments Series. CC-BY-NC

CEME Presents: Dwolla, part of the ABCs of Payments Series. CC-BY-NC

BUSINESS MODEL:

Dwolla allows users to make payments using mobile phone or computer. After signing up for Dwolla and linking an active back account, users must deposit money into their Dwolla accounts, which takes 3-4 business days,† unless the bank is FiSync enabled (see below). After the Dwolla account is funded, payments can be sent through smartphone using the Dwolla app simply by sending a particular amount to another person’s mobile phone number or Dwolla ID. Alternatively, a user can send payments via e-mail or a social networking site like Facebook, Twitter or LinkedIn using a computer. If the recipient does not have Dwolla, they are informed through e-mail or their networking site that a Dwolla payment is ready for them as soon as they sign up. Finally, merchants using a Dwolla enabled point-of-sale can initiate payments. Their point of sale terminal reports nearby customers that have the Dwolla app; the merchant selects the customer currently standing at the counter and the customer pays by confirming the transaction on his device.

† UPDATE: Dwolla rolled out a next-day service for qualified business accounts in 2014. No explicit criteria for approval were disclosed.

Dwolla has kept the same business model since inception: all transfers $10 or under are free; any transfers over $10 are charged a flat rate of $.25. Unlike other mobile payment systems that are directly tied to a credit card or debit card like LevelUp, Square and ISIS, Dwolla links directly to a bank account precluding the need to pay interchange fees to credit card companies. This can save merchants large amounts of money, both for large transactions, and for small transactions that some credit card companies charge a fixed fee for. For instance, Visa charges .05%+$.21 for certain types of purchases, making small transactions prohibitively expensive. Currently, 11% of Dwolla’s transactions done are peer-to-peer (primarily from rent payments) while business-to-business and customer-to-merchant transactions make up the rest.

Despite non-existent interchange fees, their low revenue stream may give some investors pause. Dwolla essentially only makes money through transaction volume and not transaction size; additionally, their website makes it clear that no additional fees are charged for the application, signup, account maintenance, or additional features.  In 2012, the company is reported to have processed $30 to $50 million per month. Given that the average transaction is $500, this only amounts to a yearly revenue of $300,000 – hardly enough to even cover staff salaries.

VALUE PROPOSITION:

Dwolla’s main value added is a way to transfer money for much cheaper than credit cards or payment services built on top of credit cards. For merchants, this is a clear advantage. Customers, on the other hand, do not always realize the impact of interchange fees. However, Dwolla has been adding a slew of “add-ons” to their service to appeal to a broader audience:

  • MassPay – allows payment of up to 2000 people at once; geared towards small to large businesses as a more efficient means of payroll.
  • Spots – an add-on application that allows users to see which merchants nearby accept Dwolla.
  • Proxi – An add-on that allows users to see other nearby Dwolla users in real-time.
  • Grid – Allows users to better protect their credit card information, reducing the risk of fraud.
  • FiSync – a real-time money transfer system designed to replace Automated Clearing House (ACH); allows transfers to occur within 24 hours, compared to 2-5 days for ACH.
  • Instant – An opt-in feature that allows a user to borrow up to $500 in a given month.

Finally, it is interesting to note that despite the company’s focus on expanding its banking network, one does not need a bank account to sign up for Dwolla. A person could theoretically receive and send payments exclusively through Dwolla.

HARDWARE AND PROTOCOLS:

Money is technically never passes through Dwolla. According to their website:

Dwolla does not receive, hold, or transmit User funds; Dwolla only maintains and manages information associated with User ownership of the funds; (3) Veridian is the entity that provides money transmission services upon instructions issued through the Dwolla software platform; and (4) Funds in the Veridian Holding Account are held in a pooled account.

Veridian, a major investor and bank processor manages the funds. In other words, all funds withdrawn from a user’s bank to be put into their Dwolla Account is placed into the pooled Veridian Holding Account. This legal loophole allows Dwolla to operate outside the state of Iowa, since it is technically never a money transmitter, merely a service provider for a processor, and therefore not subject to the expensive registration and licensing process.

API – One intriguing feature of Dwolla is that the company is not concerned with linking payment transfer methods to proprietary software or apps. Whereas ISIS forces users to use an ISIS app and Square users must use a Square app, Dwolla has packaged its core software into an API that it distributes for free. The effect of this is that independent developers can make individualized apps that work with the Dwolla network, but are catered to their needs.  Note that LevelUp also provides an open API.

Safety – since transfers rely on the internet, Dwolla uses the same types of security features as online payment companies like PayPal: TRUSTe, VeriSign, encryption techniques, McAfee, firewalls etc. It is yet to be seen how effective these methods will be as more consumers switch to internet based transfers.

WEAKNESSES:

Scalability: It is yet to be seen how their revenue model can be scalable without changes to the fee structure or additional fees.

Customer proposition not great: Dwolla offers no perks or rewards for customers using their app or service. Additionally, the consumer payment behavior may be more cumbersome than NFC or even QR enabled devices.

BitCoin: Dwolla has a strange and tenuous relationship with BitCoin, an alternative currency. BitCoin transfers purportedly represented a large percentage of Dwolla’s total transfers in 2011 and 2012. At the same time, BitCoin sued Dwolla for an issue relating to chargebacks.

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4 Responses to Dwolla

  1. Aaron says:

    Firstly, I would like to thank you for your blog. I have found it very informative.

    Secondly, fact check this statement “Bitcoin sued Dwolla?” Bitcoin is a distributed network. TradeHill a privately owned Bitcoin exchange (service) may have sued Dwolla.

  2. Patrick TW says:

    Thank you for such an interesting insight of Dwolla. I have always wondered how their service was operating.

  3. Erick Bzovi says:

    This is well written and informative. thanks

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