Dollar and web is the in thing: Dwolla

Venturing into new infrastructure for digital payments is hustling and bustling with innovation. Money is rapidly changing into a virtual series of ones and zeros, digital currency format which is easy to send, store and receive electronically. Designing its own digital payment network from the scratch, Dwolla Inc. bypassed the traditional channels and built something different which according to them is cheaper, faster and safer than anything that already existed.

Dwolla, a US based e-commerce company, provides an online payment system and mobile payments network only in the US. Originally founded in June, 2008, Dwolla was launched in the US on December 1, 2009, by Ben Milne (CEO) and Shane Neuerburg (CTO) as founders, in Des Moines, Iowa.

Blending the words dollar and web, Dwolla aims to allow anyone [or anything] connected to the internet to move money quickly, safely & at the lowest cost possible. It allows any entity to request and exchange money through its self-built network that securely connects to customer’s bank account and allows to move money.

The platform can be effectively built into any two-way communication device and or integrated with any software capable of secure communication of Dwolla. Cell phones, computers, hybrid closed loop card networks, parking meters, P2P banking products, NFC integration, etc. are the major options. Integration with other payment products/services is also possible. Dwolla till recently was one of the modes to add funds to accounts with bitcoin exchanges.

TOTAL FUNDING $22.8M Angel, 11/09 $250k Grant, 3/10 $55k Series A, 11/10 $1M Series B, 2/12 Union Square Ventures Village Ventures Thrive Capital Paige Craig Better Works Seventy Six Capital $5M Series C, 5/13 Andreessen Horowitz Village Ventures Thrive Capital Union Square Ventures $16.5M

Dwolla, Inc. is an agent of Veridian Credit Union (VCU). All funds in the Dwolla network are held in a pooled account at VCU. Dwolla, Inc. is the operator of a software platform which communicates user instructions to VCU for fund transfers.

Next level business moves included its own mass-payments service, FiSync integration (a real-time instantaneous alternative to ACH payments), partnership with the state of Iowa to initially process $130mn in taxes and a partnership with a mobile banking and payments service provider, mFoundry, which offered the service to its bank and credit union partners interested in offering real-time, peer-to-peer payments to their own clients. By June 2011, Dwolla had eleven financial institutions, providing access to their 600,000 potential customers.

Dwolla’s major competitors are PayPal, Revolution Money, Square, Obopay, OpenCuro Inc., Visa, PayNearMe, Google wallet, Stripe, Popmoney,etc.

Dwolla’s unique business model–people, businesses, governments, non-profits, and developers exchange money without paying a percentage to big brand payments companies. According to their website, the transaction fee reads No percentages. No hidden fees. Just 25¢ per transaction or free for transactions $10 or less. This is unlike credit card payment systems which charge up to 3.5% of the total to process such online payments.

Even being a newcomer in the third-party payments arena, Dwolla reached a volume worth $1 Mn per week in June, 2011 and in July 2011, hit $1 Mn per day. Today, its annual transaction processing run rate has exceeded a Bn dollars.

In mid-June 2011, Dwolla had 20,000 Iowa users and 15 employees. By 2012, its Iowa office flourished from 12 to 30 minds — 42 total across Des Moines, New York, Kansas City, and Omaha. It had expanded to serve more than 250,000 account holders.

In the coming years, Dwolla plans to double its workforce in Iowa and New York, build a pipeline through this country along with an expansion to San Francisco, all with the help of the latest $16.5mn round of funding.

Studying the competition, Dwolla competes directly with PayPal. Setting up Dwolla payments is similar to PayPal. Dwolla is small and lesser known right now.

However, Dwolla’s value proposition is just right to create a niche for itself. Dwolla charges 25¢ per transaction, and any transaction of $10 or less is free while the average charge by PayPal is 2.9%+30¢ on each goods and services transaction. Dwolla transfers money to a bank account on the same day or upto 3 days while PayPal consistently takes 2-4 days to move money. Dwolla allows mass payments of up to 2,000 recipients while PayPal limits the number of recipients to 250. PayPal limits total daily transactions to $10,000 but Dwolla sets the per transaction limit at $5,000 for personal accounts and $10,000 for business. In special circumstances, organizations are allowed to transfer upto $50 Mn in a single transaction.

Dwolla got a major breakthrough by tying up with Iowa’s Department of Revenue in April 2013. Through this tie up business pay cigarette stamp taxes through Dwolla and have stopped paying through mailing paper checks. This allows payment transfers to be done instantly benefiting both the business and the Department of Revenue in terms of costs and time to process. Due to Dwolla’s aggressive pricing policy, the Government will be saving nearly $4.5 Mn for transactions worth $100 Mn. The total cost of processing transactions through Dwolla would be $500,000 in comparison to that of accepting transactions over credit cards at a 5% transaction fee costing the Government $5 Mn.

Not everything has gone right with Dwolla. In June, 2012 Dwolla got sued by Tradehill (Bitcoin Currency Exchanger) for $2 Mn for breach of contract and other violations. In May 2013, Homeland Security seized Mt. Gox’s Dwolla account and revoked $2.9 Mn. Read more about the seizure here.

LTP View: Dwolla’s competitive edge has been its pricing and ease of use. Dwolla is able to make this business model scale and sustain through tie ups with Government agencies, businesses. However, for Dwolla, dealing in Bitcoins can be a risky proposition considering the legalities with Bitcoin. Apart from that, Dwolla has been able to sustain and grow its user base, thanks to transformation from paper money to electronic payments.