28 year old's startup wants to completely kill credit cards

[rhody]

http://articles.businessinsider.com/2011-11-11/tech/30381380_1_credit-card-interchange-fees-paypal"

There's a tiny 12-person startup churning out of Des Moines, Iowa.

Dwolla was founded by 28-year-old Ben Milne; it's an innovative online payment system that sidesteps credit cards completely.

Milne has no finance background, yet his little operation is moving between $30 and $50 million per month; it's on track to move more than $350 million in the next year.

Unlike PayPal, Dwolla doesn't take a percentage of the transaction. It only asks for $0.25 whether it's moving $1 or $1,000.

and

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 an $1800 charge. Dwolla is $0.25 cents.

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

This has to be too good to be true, and if not, I am sure the major credit card institutions are sharpening their swords against this startup.

Rhody...

 

[Ryan_m_b]

As I understand it there doesn't seem to be an advantage to the consumer. If an item costs X it doesn't matter to me if I pay by cash, card or Dwolla because either way I spend X. For the business I'm buying from it does matter because rather than giving a percentage of X they give a small, standard fee.

It's an interesting idea, I'm not sure if it will take off. I can't see the average person bothering to change unless many places start to offer taking Dwolla and perhaps not even then.

 

[Evo]

This is only of benefit to the business owner.

 

[Greg Bernhardt]

Dwolla is nice, they have some interesting applications (pay with your phone), but it's not revolutionary. There are plenty of PayPal alternatives now.

 

[Monique]

I have been paying for years directly from my bank account with a service called iDEAL (developed by Mollie), fast secure and easy. So what's so innovative in Dwolla.

 

[Greg Bernhardt]

So what's so innovative in Dwolla.

https://www.youtube.com/watch?v=W89wEc59g9U

https://www.youtube.com/watch?v=bDggiDaIA0I

 

[dlgoff]

http://articles.businessinsider.com/2011-11-11/tech/30381380_1_credit-card-interchange-fees-paypal"


This has to be too good to be true, and if not, I am sure the major credit card institutions are sharpening their swords against this startup.

Rhody...

Dwolla is nice, they have some interesting applications (pay with your phone), but it's not revolutionary. There are plenty of PayPal alternatives now.

OMG. I just made a PayPal transaction. Hope that's okay.

 

[Evo]

Don't get it. I pay cash, check, debit card, or credit card. I can pay with check by phone, I have directly transferred cash to friends from my bank account.

Just this morning I was reading about how these pay gimicks are causing people to spend more money.

People using American Express's signature-eliminating ExpressPay key fobs up their spending at participating merchants by 20 to 30 percent.

We're just getting started. The latest technology makes it even easier to shop without thinking. The new Starbucks app let's you pay for coffee by scanning a bar code on your phone screen. Google and PayPal are rushing to market with "mobile wallet" technology that let's you pay with a tap of your smartphone, as is Isis, a consortium of cell phone carriers partnering with MasterCard and Visa. Technology from start-up outfit Jumio let's you pay online by flashing a credit card at your computer's Web cam, a technique that founder Daniel Mattes says will encourage more impulse shopping. And some futurists say it's only a matter of time before all payments go digital. In Amsterdam, entire shopping strips are going cash-free. Can a new wave of consumer debt be far behind?

http://finance.yahoo.com/news/amazon-prime-made-me-a-shopping-machine.html

 

[Monique]

In 1996 a system was introduced that consumers could load a chip on their bank card with virtual money and pay by showing the card. It was a really big flop, now all these "new" technologies are popping up that you can pay with your phone. My debit card works just fine, apparently I am getting old..

 

[Evo]

apparently I am getting old..

or wiser

 

[rhody]

I can personally attest that a large bank to bank transfer of funds (real estate transaction), took two business days, and to add insult to injury they charged me $27.50 for the privilege of doing so.

I was not a happy camper with the situation, although I realize for transactions over 10K the transaction is be reported to the Gov't, IRS, Homeland security, etc... for security and tax reasons. Even with the requirement, I find it hard to believe it took two business days to complete the transaction, and that I was charged a relatively nominal fee ($27.50) to boot.

When you say that it costs nothing to the consumer, that is not true. Merchant's figure in the cost or transacting business using credit and debit cards and add that to the price that the consumer pays, he doesn't SEE the hidden cost. A flat 25 cents per business transaction is good for all involved, except of course the credit card companies. That is my humble opinion, of course.

Rhody...

 

[AlephZero]

When you say that it costs nothing to the consumer, that is not true. Merchant's figure in the cost or transacting business using credit and debit cards and add that to the price that the consumer pays, he doesn't SEE the hidden cost. A flat 25 cents per business transaction is good for all involved, except of course the credit card companies. That is my humble opinion, of course.

Scott Adams (Dilbert cartoonist) defined an optimist as "a pessimist with no work experience".

Let's update that to "somebody who thinks reducing card transaction costs will reduce prices, rather than boost trader's profits"...

 

[QuarkCharmer]

Scott Adams (Dilbert cartoonist) defined an optimist as "a pessimist with no work experience".

Let's update that to "somebody who thinks reducing card transaction costs will reduce prices, rather than boost trader's profits"...

I don't see any problems with "boosting trader's profits" It's not likely that this idea will catch on, they rarely do, and as mentioned above, there have been countless paypal alternatives. Paypal was not really innovative anyway, it was just piggybacked into mainstream by ebay.

I would think that at the very least, this credit card payment alternative would cause credit companies to think about renegotiating their rates for merchant transactions. Whether or not the consumer will see the price drop is irrelevant.

But that's just my opinion, and it could be largely wrong.

 

[turbo]

I have exactly one credit card, and it is paid off in full every month. Decades ago, I had three (Visa, MC, and Amex) because I traveled a lot and not all vendors would take them. For a time, when I had business in Boston, I had to use my smaller-limit CCs to entertain customers because many members of the local restaurant association boycotted Amex due to their very high transaction fees. They were charging about double the percentage as Visa and MC.

Anyway, one credit card and checks from the credit union and the bank that has my money-market account are quite sufficient. No new tech needed. I don't want to pay my bills with my cell-phone. I have never once sent a text message, either. Yes, living fossils exist!

 

[rhody]

QC, Aleph,

You make good points. Consider this, unless a business keeps track of what percentage their products are bought and with what form of payment, PayPal, Credit, Debit, etc... they cannot predict what the "real" cost of the item actually is, and to adjust for their profit margin accordingly. In a tight economy, any little advantage to giving the "consumer a break" should most likely help sales of whatever product or service are being offered. The law of supply and demand usually wins in the end, does it not ?

Rhody...

 

[AlephZero]

Consider this, unless a business keeps track of what percentage their products are bought and with what form of payment, PayPal, Credit, Debit, etc... they cannot predict what the "real" cost of the item actually is, and to adjust for their profit margin accordingly.

I don't know how the law affects this in a general online trading situation, but the UK Driver & Vehicle Licencing Agency has an up-front attitude to it. If you want to renew your car tax online, you can pay £x by debit card, or £x + a transaction fee by credit card. There's nothing wrong with giving the customer the choice.

Of course you don't know how "accurate" the transaction fee is, but you can't complain about the general principle of having a choice.

 

[rhody]

Here is example of when I pay a bill using a check versus credit card. When I pay my quarterly property taxes, I pay by check, why, you ask ? Because our town adds a $ 2.50 surcharge to the bill if you pay by debit or credit card, presumably to help cover the cost they incur when they process the transaction for the town. There is no way it costs $ 2.50 to frank a transfer of funds. Just goes to show common sense does not always prevail. I wonder how many people would pay on time if they could use debit or credit cards without a fee imposed ? I for one would.

Rhody...

 

[DaveC426913]

As I understand it there doesn't seem to be an advantage to the consumer. If an item costs X it doesn't matter to me if I pay by cash, card or Dwolla because either way I spend X. For the business I'm buying from it does matter because rather than giving a percentage of X they give a small, standard fee.

The advantage seems pretty obvious to me.

If the business doesn't have to pay out that money to the credit card co, they can take some in profit and pass some of it back to the consumer by being able to offer more competitive prices.

Anytime a middle man is cut out of a transaction, ultimately both parties will benefit.

 

[Ryan_m_b]

Dave whilst I see that this is the theory I see no reason why it is necessary in practice.

 

[DaveC426913]

Dave whilst I see that this is the theory I see no reason why it is necessary in practice.

Businesses being able to offer more competitive prices while simultaneously increasing their own profit margins? I know, crazy, right?

 

[AlephZero]

Businesses being able to offer more competitive prices while simultaneously increasing their own profit margins? I know, crazy, right?

That scenario only works if the customers change their payment methods en masse. The problem must be how to get say > 50% of transactions going through the new system before the benefits to everybody start to kick in.

You can probably do that in a small scale pilot like their rent collection example, where you have a very small number of "sellers" (rent collection agencies) and the "buyers" (renters) have no choice about who they "buy" from. That is a completely different scenario from shopping for food, clothes, etc.

If they want to make it work on a national scale, I think they will have to get some "big names" like Amazon on board to get the "free advertising" that would create. But then, they would have the problem of an instant "upgrade" from a few hundred thousand users to potentially hundreds of millions.

But they certainly won't succeed by not trying.

 

[DaveC426913]

That scenario only works if the customers change their payment methods en masse. The problem must be how to get say > 50% of transactions going through the new system before the benefits to everybody start to kick in.

But that wasn't the criticism that you put forth. The issue of when it becomes profitable is something separate from whether the principle is sound.

 

[KingNothing]

I'm not sure how this replaces credit cards. Is there a Dwolla card? Is it simply the same systems as before only charging less money?

 

[TheStatutoryApe]

There are many "sellers" that find it cost prohibitive to use services that would allow certain types of transactions and so require the consumer to use payment methods that require payment for the transaction on their part. For instance none of the places that I have rented at have accepted any payment methods other than cashiers check or money order both of which require payment by their renters for the service. Twenty-five cents is nothing. Most any "seller" should be able to afford that.

 

[Proton Soup]

As I understand it there doesn't seem to be an advantage to the consumer. If an item costs X it doesn't matter to me if I pay by cash, card or Dwolla because either way I spend X. For the business I'm buying from it does matter because rather than giving a percentage of X they give a small, standard fee.

It's an interesting idea, I'm not sure if it will take off. I can't see the average person bothering to change unless many places start to offer taking Dwolla and perhaps not even then.

if he got a large enough market share, then it could make some businesses more competitive than their competition that is accepting payment with 3% implied markup. especially with larger purchases.OK, i guess I'm agreeing with Dave. just think about it Ryan, this is another walmartization of the marketplace that will benefit the consumer, with traditional businesses crying foul.

 

[Evo]

Absolutely no way would I use Dwolla!

The way it works is that you set up an account with them then transfer money from your bank to sit in your dwolla account, waiting for you to use it. Since it is a bank transfer

Why is my deposit taking so long to show up in my Dwolla Account?
Last Updated: Nov 08, 2011 01:41PM CST

It takes 2 - 4 business days to transfer funds from your bank account to your Dwolla Account or to withdraw funds out of Dwolla to your bank account. This process may take longer if the timeframe includes a weekend. Please note, due to varying bank processing timeframes, you will see the funds subtracted from your bank account prior to them posting to your Dwolla account.

http://help.dwolla.com/customer/por...king-so-long-to-show-up-in-my-dwolla-account-

Oh, and of course there will never be mistakes. Your money will never accidently get credited to someone else's account, or "lost", between your bank, dwolla, and the company due to receive the money.

I'm sure Dwolla is investing the money they are holding (like your bank) and profiting off of it.

 

[Proton Soup]

doesn't paypal do the same thing, though?

 

[Evo]

doesn't paypal do the same thing, though?

No, *when* I make a purchase, I give paypal the exact amount of my purchase and the funds are made available immediately. I don't have to send money to Paypal to hold for me incase I wish to make a purchase in the future.

 

[Proton Soup]

No, *when* I make a purchase, I give paypal the exact amount of my purchase and the funds are made available immediately. I don't have to send money to Paypal to hold for me incase I wish to make a purchase in the future.

ok. i wonder if it's a size thing or has something to do with minimizing their expenses.

 

[Borek]

I can personally attest that a large bank to bank transfer of funds (real estate transaction), took two business days, and to add insult to injury they charged me $27.50 for the privilege of doing so.

I am paying everything by bank transfer, not moving from the computer - everything done via internet. I pay 1 PLN for each transfer in Poland (that's about $.30) or nothing if the target account is in the same bank. As far as I can tell (and I just checked to be sure) charge doesn't depend on the amount transferred.

Charges in other banks in Poland are different, but not by much.

It gets more expensive if I am not using internet - whenever teller is involved it is 7 PLN (transfer to other bank, around $2) or 3 PLN (same bank, around $1).

Edit: oh, and the money rarely travels longer than several hours. It is a little bit complicated as it depends on the timing of "incoming and outcoming transfer sessions" of banks (when batches of transfers are sent/fetched to/from intermediate computers), but if I give instruction to transfer money before 12 a.m. it lands on the receiving account the same day always. And they plan to make it much faster, as there will be no sessions, but transfers will be done in the real time all day. At the moment transfers are immediate only in both accounts are in the same bank.

 

[Evo]

I am paying everything by bank transfer, not moving from the computer - everything done via internet. I pay 1 PLN for each transfer in Poland (that's about $.30) or nothing if the target account is in the same bank. As far as I can tell (and I just checked to be sure) charge doesn't depend on the amount transferred.

Charges in other banks in Poland are different, but not by much.

It gets more expensive if I am not using internet - whenever teller is involved it is 7 PLN (transfer to other bank, around $2) or 3 PLN (same bank, around $1).

Edit: oh, and the money rarely travels longer than several hours. It is a little bit complicated as it depends on the timing of "incoming and outcoming transfer sessions" of banks (when batches of transfers are sent/fetched to/from intermediate computers), but if I give instruction to transfer money before 12 a.m. it lands on the receiving account the same day always. And they plan to make it much faster, as there will be no sessions, but transfers will be done in the real time all day. At the moment transfers are immediate only in both accounts are in the same bank.

I make bank transfers all of the time and they are free if it's within the same bank and they are instantaneous. I haven't made a transfer to another bank in awhile but it was similar to your experience.

 

[rhody]

I make bank transfers all of the time and they are free if it's within the same bank and they are instantaneous. I haven't made a transfer to another bank in awhile but it was similar to your experience.

Evo, Borek,

Here is the difference in my case, the amount was over 10,000 US dollars, that is a whole new ball game with a whole new set of rules. For relatively small transactions of a couple of thousands of dollars, I would imagine that the two day rule would not apply. Evo says that is not true. I didn't dig deep into their policies and have used PayPal in the past with no problems, I have sold items using PayPal and had to pay the 2.9 % fee, which obviously I would have preferred not to do. I say, let dwolla evolve and grow and see if in fact in a year or two their transaction fees remain at $ 2.50, and if merchants on a wide scale embrace them.

Rhody...

 

[Evo]

Evo, Borek,

Here is the difference in my case, the amount was over 10,000 US dollars, that is a whole new ball game with a whole new set of rules. For relatively small transactions of a couple of thousands of dollars, I would imagine that the two day rule would not apply. Evo says that is not true.

No, I said within the same bank it's instantaneous, and that I hadn't made an outside transfer in awhile, but it was similar to Borek's examples.

There was one time that a bank transfer to an out of state bank disappeared. They put a tracer on it, so it was about a week before they gave up and deposited the funds into my friend's account, I don't know if they ever found the money, but I did not have to fight with them, they automatically covered it.

 

[DoggerDan]

My landlord requires payment in one of three ways:

1. Cashier's/counter check. My cost: $3/month. My risk: Negligible.

2. Online via credit card: My cost: $10/month. My risk: Low.

3. Using their system, which gives them unlimited access to either my checking or savings accout: My cost: $0/month. My risk: Ridiculously unacceptable.

I've approached them repeatedly about getting with the program and implementing a PayPal system, but they refuse, claiming it's "expensive" and "too risky for their tenants." Clearly, they haven't actually looked into PayPal, as it's the least risky option, and the same cost as getting a counter check from my bank.

 

[rhody]

No, *when* I make a purchase, I give paypal the exact amount of my purchase and the funds are made available immediately. I don't have to send money to Paypal to hold for me incase I wish to make a purchase in the future.

So what is the difference then 2.9% charged (with PayPal) instantly or sitting in limbo for 2 days and making interest in those two days ? The net effect is the same, dwolla and PayPal make their fees just in a different way, and with dwolla you won't see money deposited to you for two days. I am pretty sure if money is in your PayPal account and you want to transfer it to your bank account they charge you another transaction fee as well.

Rhody...