The 28 Year-Old Who Wants To Kill Credit Cards

[Parsad]

Interview with Dwolla CEO, Ben Milne.  Thanks to Frank for sending me the article!

 

http://ca.finance.yahoo.com/news/This-28YearOlds-Startup-Is-siliconalley-2539075670.html?x=0

 

I love his comment:

 

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.

 

Cheers!

 

 

 

[ragnarisapirate]

awesome link. Thanks Parsad!

[SmallCap]

I just love reading articles like this one, thanks so much for posting it.

 

I turned around and posted it on facebook.

[biaggio]

Good for them for thinking of the idea but is it possible for them to make it on $0.25 per transaction?

 

 

[DCG]

Interview with Dwolla CEO, Ben Milne.  Thanks to Frank for sending me the article!

 

http://ca.finance.yahoo.com/news/This-28YearOlds-Startup-Is-siliconalley-2539075670.html?x=0

 

I love his comment:

 

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.

 

Cheers!

 

Um...so he's never heard of the enormously successful company called Paypal?

[ragnarisapirate]

Interview with Dwolla CEO, Ben Milne.  Thanks to Frank for sending me the article!

 

http://ca.finance.yahoo.com/news/This-28YearOlds-Startup-Is-siliconalley-2539075670.html?x=0

 

I love his comment:

 

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.

 

Cheers!

 

Um...so he's never heard of the enormously successful company called Paypal?

 

He mentioned paypal in the interview 5 times... and his concept could likely do some immense damage to that company.

[DCG]

Interview with Dwolla CEO, Ben Milne.  Thanks to Frank for sending me the article!

 

http://ca.finance.yahoo.com/news/This-28YearOlds-Startup-Is-siliconalley-2539075670.html?x=0

 

I love his comment:

 

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.

 

Cheers!

 

Um...so he's never heard of the enormously successful company called Paypal?

 

He mentioned paypal in the interview 5 times... and his concept could likely do some immense damage to that company.

 

I was referring to the quote of nobody building a payment network in 30 years (and admittedly, posted before reading the article).

 

That said, I don't know why he keeps saying Paypal is just a portal for credit cards, which it clearly is not. PayPal added the functionality of processing credit cards, but it is a payment network. It sounds like he's just copying Paypal, but with a worse business model, and just trying to compete on price.

 

How is his business model going to do 'intense damage' to Paypal?

[beerbaron]

At about 500$ per transaction and 1M$ per day that means he is making 500$ in revenues that is ridiculously small. I am affraid it's pricing is too low to support it's idea. Great entrepreneur tough!

 

BeerBaron

[ExpectedValue]

 

That said, I don't know why he keeps saying Paypal is just a portal for credit card, which it clearly is not. PayPal added the functionality of processing credit cards , but it is a payment network.

 

Not according to Paypal.

 

In a letter to the Fed, PayPal takes the position that – not only is it not a debit card or payment network – it is a large merchant of sorts. Like merchants, PayPal pays credit card companies a fee whenever it processes a transaction where the PayPal account is tied to an underlying debit or credit card. PayPal also pays banks fees for processing credit card transactions, said a spokesperson.

 

“The networks consider us a large merchant,” said Sara Gorman, a spokesperson with PayPal. “We pay the same fees that merchants do.”

 

However, like a payment processor, PayPal makes money by charging merchants fees on each transaction. Fees very from 1.9% to 2.9% of the entire transaction, depending on the volume of business a merchant does with PayPal, and a $0.30 flat fee per transaction.

 

via: http://www.cnbc.com/id/42916668/

 

 

[ragnarisapirate]

Interview with Dwolla CEO, Ben Milne.  Thanks to Frank for sending me the article!

 

http://ca.finance.yahoo.com/news/This-28YearOlds-Startup-Is-siliconalley-2539075670.html?x=0

 

I love his comment:

 

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.

 

Cheers!

 

Um...so he's never heard of the enormously successful company called Paypal?

 

He mentioned paypal in the interview 5 times... and his concept could likely do some immense damage to that company.

 

I was referring to the quote of nobody building a payment network in 30 years (and admittedly, posted before reading the article.

 

That said, I don't know why he keeps saying Paypal is just a portal for credit card, which it clearly is not. PayPal added the functionality of processing credit cards , but it is a payment network.

 

fair point, but, this seems to be a really different idea, in that it makes me wonder why I would ever want to use paypal again... I almost always use my bank acct to buy stuff. Lets say that the seller who receives the payment and I split the cost savings from the new system. We both win: the seller keeps more of what is his, while I get the same product and save some money.

 

To me, Paypal just took what businesses already do with credit card payments, and made it happen for individuals. This guy is linking individuals up directly. Same end result, but, a very different process.

 

This all said, I do wonder what will happen with the company: it seems that he might be bought out at some point, and then the operation shuttered. I can't imagine that other processing companies want him in business, as if they would adapt to his model, it would destroy their margins.

 

Even if he would take his rate up to a dollar a transfer, it would be cheaper than a money order or other companies on a lot of offerings.

[DCG]

PayPal operates as a network, and describes it as such on their website. https://www.paypal.com/worldwide/

 

Credit card processing is only a part of their business. They offer exactly what this guy is trying to do with an immensely larger scale. They have build a huge brand built on trust and security. What Is it going to cost this company to achieve that? Also, Paypal offers unparalleled fraud protection/prevention for merchants (and was built as a fraud prevention company before becoming a payment network and processing company), and has hundreds of people staffed to handle fraud. Other companies act as portals for credit cards because it takes them out of the loop of being liable for fraud.

[bookie71]

Forbe also had an article on the fellow

http://www.forbes.com/sites/haydnshaughnessy/2011/11/12/dwolla-the-dollar-that-keeps-its-value/

[Parsad]

Um...so he's never heard of the enormously successful company called Paypal?

 

I think his point was that Paypal and other third party payment systems rely on the same ACH network that the banks use to process credit card charges.  Whereas Dwolla is setting up an entirely separate system that doesn't utilize that network at all.  It will very difficult to displace the credit card companies or Paypal.  I only put the article on here because I just like articles where entrepreneurs are trying to think outside the box and attempting to introduce disruptive systems. 

 

I'm a hard-core capitalist, and anytime you get anybody who is attempting something significant, it forms an intriguing case study...whether it succeeds or fails.  Remember, at one time no one thought iTunes would do anything to change the music industry, or even that Paypal would succeed in taking market share away from other payment systems.  Cheers!

[Junto]

Um...so he's never heard of the enormously successful company called Paypal?

 

I think his point was that Paypal and other third party payment systems rely on the same ACH network that the banks use to process credit card charges.  Whereas Dwolla is setting up an entirely separate system that doesn't utilize that network at all. 

 

Parsard, I am almost certain the backbone of this system is the ACH network. I think he is however trying to improve the network to process approvals faster. Similar to preauthorizations in the debit card network. From my perspective as a banker, it still looks like a riskier situation to a point of sale retail merchant but it has its place for many other transaction bases where a two to three delay delay for approvals is not of concern. I have been trying over the last couple of days trying to breakdown the business model some (more specifically from a financial institution perspective). A bank makes money from every ACH transaction it processes so his Credit Union partner is likely collecting its standard/slightly reduced fee and he is taking a very small spread above. Once the software is perfected, the margins will be significant. The idea from his perspective is to disrupt the small transaction business of Pay Pal and Credit Card firms as that is where he will make the most money.

 

I have been watching this market closely. For those of you who read http://www.inc.com, the latest Inc 500 had a lot of e-payment firms in their top 500 that were financial services oriented showing enormous growth over the past three years. I have been looking to see if there is a service my employer or family financial institutions could take advantage of to drive up non-interest income.

 

 

[ragnarisapirate]

Um...so he's never heard of the enormously successful company called Paypal?

 

I think his point was that Paypal and other third party payment systems rely on the same ACH network that the banks use to process credit card charges.  Whereas Dwolla is setting up an entirely separate system that doesn't utilize that network at all. 

 

Parsard, I am almost certain the backbone of this system is the ACH network. I think he is however trying to improve the network to process approvals faster. Similar to preauthorizations in the debit card network. From my perspective as a banker, it still looks like a riskier situation to a point of sale retail merchant but it has its place for many other transaction bases where a two to three delay delay for approvals is not of concern. I have been trying over the last couple of days trying to breakdown the business model some (more specifically from a financial institution perspective). A bank makes money from every ACH transaction it processes so his Credit Union partner is likely collecting its standard/slightly reduced fee and he is taking a very small spread above. Once the software is perfected, the margins will be significant. The idea from his perspective is to disrupt the small transaction business of Pay Pal and Credit Card firms as that is where he will make the most money.

 

I have been watching this market closely. For those of you who read http://www.inc.com, the latest Inc 500 had a lot of e-payment firms in their top 500 that were financial services oriented showing enormous growth over the past three years. I have been looking to see if there is a service my employer or family financial institutions could take advantage of to drive up non-interest income.

 

So, here is my question for you (which, may prove my ignorance on the subject) but, in a day and age such as we live in, why can't debits and deposits immediately show up in a bank account? It doesn't seem like the infrastructure isn't there to do it.

[fuluvu]

Dwolla's system only does a small part of paypal and charges much, much higher price than paypal. For paypal, if the money is personal fund transfer, the cost is ZERO. My tenant pays rent using paypal all the time, paypal does not charge me or my tenant. Paypal only charges a fee for purchase. In this case, paypal is responsible for the buyer to get the quality product and the seller gets the money. I do not think that this company can do it with $0.25 fee. I do not see any competitive advantage of Dwolla over paypal.

[oddballstocks]

Very interesting article, in some ways it reminds me of a person who is stuck on a simplicity kick.  They'll go into a big company and think that flat management or agile, or something simple and quick will revolutionize the system.  Eventually they start to learn it doesn't scale, and eventually the new system starts to look just like the old one.  There is a reason the current system exists as it does, be it inertia, regulation, or business reasons.

 

I think it's similar with Dwolla, right now it's small and simple, transferring money between people or landlords.  What happens what the account holder is a criminal, can they flag that?  Or what happens if someone wants to transfer money from Iowa to Brazil?

 

The reality with Visa and Mastercard is they have created worldwide networks.  I can literally go anywhere in the world, purchase something with a credit or debit card, and I either get a bill, or the money is removed from my bank.  This is the moat with V, MA, AXP (to a lesser extent).  The cost to replicate and build out a network that provides the same functionality and ease is incredibly costly and fraught with regulations, intra-nationally and internationally.

 

A few things came to mind, with ACH there is a clearinghouse that guarantees transactions.  That's why banks like the system, the liability is shifted during the transaction, I wonder how Dwolla handles this.  Do they accept the risk?  I also noticed in the article people can store money in their system, but from what I understand they're not a bank.  So there's no federal insurance on this, if the company collapses I could lose my money with no recourse.

 

I have to give the guy props though for taking on something big.  I'm guessing they will eventually find a niche market and reside there comfortably.

[Junto]

A few things came to mind, with ACH there is a clearinghouse that guarantees transactions.  That's why banks like the system, the liability is shifted during the transaction, I wonder how Dwolla handles this.  Do they accept the risk?  I also noticed in the article people can store money in their system, but from what I understand they're not a bank.  So there's no federal insurance on this, if the company collapses I could lose my money with no recourse.

 

As I mentioned, I believe it is built off the existing ACH network. I do think the Credit Union likely has a depository account that reconciles the incoming and outgoing transactions. The Credit Union is insured through the NCUA www.ncua.gov/ up to regulatory limits although I do not know how Dwolla titles its accounts to ensure coverage (if it does).

 

Ragnar asked regarding the posting of deposits and transfers. It relates to the sender actually having the funds in the account. Just because the ACH originated does not mean the the funds were available in the account the ACH was trying to pull from. This may result in a return of the ACH. The concern is a Point of Sale purchase where the goods are provided but the account did not have funds available. This is why I referenced needing the preauthorization approval similar to a debit card. If a transaction is preauthorized the bank/credit union as far as I am aware, has to accept the payment against the bank's account.  It may cause an overdraft from the account holder if checks or other charges clear between the preauthorization and the settlement. I was trying to find a good comment from an article I was reading last night that explains this in more detail and when I do I will forward it along.

 

I am a commercial lender so I know enough to be dangerous but certainly am trying to understand this area more as I see it as a growth area over the next few years.

[tengen]

Dwolla sounds like HyperWallet (or at least the old HyperWallet before they changed their focus to other things) but with a sexy social media veneer, better marketing and the benefit of technical advances that have made it easier to layer on top of ACH.

 

By the way, if you have a merchant account with PayPal, you get socked 2-3% + $0.30 for every payment you receive. That's Dwolla's sweet spot.

[DCG]

By the way, if you have a merchant account with PayPal, you get socked 2-3% + $0.30 for every payment you receive. That's Dwolla's sweet spot.

 

Paypal is generally cheaper than most other merchant accounts that charge monthly fees, and yes, Dwolla is trying to out-price paypal. I said this earlier in the thread as well, but the main thing analysts and other people don't understand about Paypal is how important and excellent their fraud prevention is. I'm unclear what level of fraud liability Dwolla takes on and what they have in place to prevent it.

 

I ran a eCommerce site, as well as worked for a couple eCommerece sites, and loved using Paypal to accept credit cards and payments. Fraud is a huge problem for online stores, and Paypal's built in fraud provention (which is built on algorithms they've been building for years, and again, the company was founded as a fraud prevention/protection company and later realized they could apply what they built to payments). Paypal saves merchants large amounts of money every year that they would've lost to fraud...I'm guessing in many cases, more than they'd save by paying Dwolla a smaller fee per order.

 

Another big draw of Paypal is as a merchant, is how they handle refunds/credits. When using other merchant accounts, you charge customers for their order, and the merchant account takes a cut of it. If you need to credit the customer, the merchant account still keeps their cut. With Paypal, they credit you back their fees any time you issue a credit. This might not sound like a big deal, but they add up.

 

Again though, I'm unclear what the level of fraud is with ACH transactions - probably quite a bit less than credit cards. So yes, there might be a market for Dwolla, but I don't agree with the comment that their business model will pose a big threat to companies like Paypal. And most of my comments are more related to small businesses. Large companies can get pretty good pricing on merchant accounts. And of course Dwolla might be fine for individual-to-individual exchanges.