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

  • #1
rhody
Gold Member
630
3

Main Question or Discussion Point

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

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...
 
Last edited by a moderator:

Answers and Replies

  • #2
Ryan_m_b
Staff Emeritus
Science Advisor
5,841
711
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.
 
  • #3
Evo
Mentor
23,127
2,577
This is only of benefit to the business owner.
 
  • #4
18,084
7,502
Dwolla is nice, they have some interesting applications (pay with your phone), but it's not revolutionary. There are plenty of PayPal alternatives now.
 
  • #5
Monique
Staff Emeritus
Science Advisor
Gold Member
4,149
64
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.
 
  • #6
18,084
7,502
So what's so innovative in Dwolla.
https://www.youtube.com/watch?v=W89wEc59g9U

https://www.youtube.com/watch?v=bDggiDaIA0I
 
  • #7
dlgoff
Science Advisor
Gold Member
3,801
1,698
http://articles.businessinsider.com/2011-11-11/tech/30381380_1_credit-card-interchange-fees-paypal" [Broken]


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. :wink:
 
Last edited by a moderator:
  • #8
Evo
Mentor
23,127
2,577
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 lets 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 lets 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 lets 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
 
  • #9
Monique
Staff Emeritus
Science Advisor
Gold Member
4,149
64
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..
 
  • #10
Evo
Mentor
23,127
2,577
  • #11
rhody
Gold Member
630
3
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 priviledge 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...
 
  • #12
AlephZero
Science Advisor
Homework Helper
6,994
291
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"...
 
  • #13
1,039
2
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.
 
  • #14
turbo
Gold Member
3,077
45
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!
 
  • #15
rhody
Gold Member
630
3
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...
 
  • #16
AlephZero
Science Advisor
Homework Helper
6,994
291
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.
 
  • #17
rhody
Gold Member
630
3
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...
 
  • #18
DaveC426913
Gold Member
18,643
2,115
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.
 
  • #19
Ryan_m_b
Staff Emeritus
Science Advisor
5,841
711
Dave whilst I see that this is the theory I see no reason why it is necessary in practice.
 
  • #20
DaveC426913
Gold Member
18,643
2,115
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?
 
  • #21
AlephZero
Science Advisor
Homework Helper
6,994
291
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.
 
  • #22
DaveC426913
Gold Member
18,643
2,115
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.
 
  • #23
863
4
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?
 
  • #24
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.
 
  • #25
100
1
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.
 
Last edited:

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

  • Last Post
Replies
3
Views
4K
  • Last Post
Replies
9
Views
2K
  • Last Post
Replies
12
Views
3K
  • Poll
  • Last Post
Replies
2
Views
6K
  • Last Post
Replies
16
Views
3K
  • Last Post
Replies
7
Views
5K
  • Last Post
3
Replies
53
Views
8K
  • Last Post
Replies
7
Views
2K
Replies
5
Views
6K
Replies
5
Views
619
Top