The 18,000-member soccer fan club American Outlaws is offering $150 discounts on a package trip to the World Cup in Brazil this summer to members who pay online via Dwolla instead of PayPal. So far, the club has paid $58 in Dwolla transaction fees instead of $32,527 to PayPal.
The Dwolla platform, which charges $0.25 per transaction, no matter the transaction size, has the potential to disrupt the credit card industry and save business owners a bundle of money.
Credit card swipe fees are the bane of many a small business. Every transaction can cost 3 percent or more in interchange fees. For online retailers the fees are virtually unavoidable; even PayPal transactions cost a seller 2.9 percent.
Large retailers operating on bigger margins can pass those costs along to the customer. But small businesses can’t compete that way. Swipe fees can reduce their profit margins by half—costing as much as a part-time worker, or a new piece of equipment would. What’s more, merchants don’t see the money from credit card sales in their bank for a week.
When Ben Milne was in business manufacturing speakers, he paid more than $50,000 in interchange fees on $1.5 million in online sales. “That cost was the difference in hiring a production manager,” he says. “As a small business owner, I didn’t want to wait 7 days, and lose 3 percent. I wanted to get paid fast electronically.”
So Milne started looking for a less expensive way to let people pay him. When he landed on a solution in 2009, he sold his speaker business and co-founded Dwolla, a web-based company with a mission to save small businesses from interchange fees. Today, Dwolla (a mashup of “dollar” and “web”) services 35,000 companies with a network of 500,000 consumer members, and counting.
Credit card transactions, Milne explains, rely on a costly technological infrastructure. “Visa and MasterCard would not have a good day if they decided to charge you less than it costs them to run the technology,” he explains.
He sought a new method that wouldn’t require merchants to change the way they do business and would let them see much more than a nominal reduction in transaction costs. Milne did away with high fees by doing away with the interchange; he built a system from scratch. He says Dwolla is able to “get money from point A to point B as fast as possible for the lowest costs” because it is built entirely on the Internet.
The Internet-based payment network charges merchants just $0.25 for each transaction of $10 or more. Smaller transactions are free. “That isn’t charity,” Milne says. He’s counting on those users “creating more revenue-generating transactions.”
Milne says his biggest problem now is educating consumers and businesses. In order to pay a merchant via Dwolla, a customer must create an account. It takes a matter of minutes to register and link to your bank account, but unless you know a merchant who accepts Dwolla, there's little incentive to register.
Those who stand to benefit from the tool, however, are eager to spread the word and, like the American Outlaws, even offer perks to customers to use it. It’s not just e-commerce operations that see the value. Milne says Small Farm Central, a software provider for community supported agriculture programs, saved farmers more than $11,000 in interchange fees last year by enabling them to accept Dwolla payments. Landlords use Dwolla to collect payments from tenants, religious organizations rely on it for tithing, and friends and family can use it to reimburse one another for expenses or give cash gifts.
A lot of Dwolla’s volume, Milne says, is in B2B transactions, where the accounts receivable or accounts payable departments are using Dwolla instead of cutting checks. “Dwolla’s network offers complete accounting entry and reconciliation. You don’t have to do paperwork, and you can just upload a file to request money from people.”
“Dwolla replaces the plastic card entirely,” Milne explains. “Everything is done virtually.” The closest comparison on the consumer level is PayPal without the excessive fees, he says, but for small businesses “it’s like accepting Visa or MasterCard at a much lower cost.”