How a Tiny Des Moines Start-Up Believes It Can Beat the Credit Card Industry

The odds are stacked against Dwolla.

It believes it has found a way to build a payment network that runs on cash and eliminates the costly fees associated with credit cards.

It is those fees, called interchange rates, that make other companies, like Visa and MasterCard, a ridiculous success.

To disrupt the system, the Des Moines, Iowa-based company is building a digital wallet that allows people to pay for an item at a store or in person (like the babysitter) using the Dwolla mobile application.

Today, it rolls out a new part of the system, which it hopes will financially support lower interchange rates for merchants.

The hitch is that instead of the entire burden being on the merchant, like it is now, consumers will be expected to pay for what they use. It would sort of be like a bank charging for checking (and we know how well that goes over).

Ben Milne, the founder of Dwolla, believes that if the costs of the system are transparent then people will understand why they have to pay. “There’s a cost to the network and we think everything should be apparent and upfront to everyone,” he says.

So far, there are two critical pieces of the operation.

The first one rolled out a few weeks ago and makes any transactions under $10 free to the merchant. Normally those transactions are cost prohibitive to merchants because they have to pay around 2.75 percent per transaction. On small purchases, that can be their profit margin.

The second part of the system rolls out today, and explains how Dwolla believes it can make money even when it doesn’t charge for small transactions.

The feature is called “Instant.”

It will allow Dwolla users who sign up for it to have access to cash immediately.

The company doesn’t mean the kind of money that folds, but rather allowing the free exchange of money between people and merchants without any fees — like cash. Think of it as a little bit like PayPal when there’s no fees.

Here’s how it works:

Users sign up for Dwolla and link it to a bank account.

They pay $3 a month to get access to cash immediately instead of having to transfer money from their account to Dwolla each time they want to use it, which can take two or three days. Users will have a credit line of up to $500. If they fail to pay off their balance at the end of the month, they will be charged $5. The subscription can be turned off at any time.

In the system, any transactions over $10 will cost 25 cents, which is paid by the merchant (or a person can volunteer to pay for it, which happens sometimes if it’s a donation).

The feature is even more important on the back end because it brings down a merchant’s cost of accepting credit. Instead of paying upwards of 2.75 percent per transaction, merchants will pay zero for purchases under $10.

Dwolla is working with TMG Financial Group in order to be able to extend the line of credit to its users.

The system may be a tougher sell to consumers, who are currently showered with free accounts and other incentives, like airline miles, for using credit cards.

Generally, Dwolla is part of the bigger trend of payments going digital. Google, Visa, MasterCard, cellphone carriers, American Express, PayPal and a host of other start-ups believe in the value of making money more accessible and losing the legacy form factor of a plastic card.

If consumers do buy into what Milne is trying to do, it still might be difficult to actually use.

The company is tiny. It has roughly 15 employees, 70,000 users and is live in up to 4,000 locations in the U.S.

Dwolla’s Ben Milne knows the odds and is still optimistic.

“Life is a hustle, and it’s not going to be easy to build these things. But we weren’t in rooms last year that we are in today, and the size of the financial institutions we are talking to right now are large companies.”


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Another gadget you don’t really need. Will not work once you get it home. New model out in 4 weeks. Battery life is too short to be of any use.

— From the fact sheet for a fake product entitled Useless Plasticbox 1.2 (an actual empty plastic box) placed in L.A.-area Best Buy stores by an artist called Plastic Jesus