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Dwolla's out to change the way money moves

As announcements go, it might not have seemed very big, just a press release noting that a credit union in Iowa serving 160,000 customers had activated a new platform for transferring funds. But if Dwolla has its way, that small announcement may someday be seen as the opening volley in its battle to completely transform the way money is handled in the U.S. 

On June 15, Dwolla, the Des Moines, Iowa-based mobile payment startup, announced that Veridian Credit Union, a small financial institution in Waterloo, Iowa (which is also a financial backer of the startup) had activated Dwolla's FiSync platform.

FiSync enables real-time bank-to-bank fund transfers and opens up a number of fund transfer services to Veridian's customers. For instance, customers of Veridian can send money between accounts using FiSync. They can also use the Dwolla website, either online or via mobile browser, to top up their Dwolla mobile payment app. Or they can send funds through Dwolla's app or online services to Facebook and Twitter accounts, or via email or SMS message.

Big deal, right? This is all pretty standard for payment platforms and there are several companies providing very similar services.

But FiSync is different — and potentially disruptive — in a couple of important ways. First, FiSync is a brand new network built by Dwolla from the ground up. It's not sitting on any legacy systems, so Dwolla sets the rules and doesn't pay a fee on every transaction for the privilege of riding someone else's rails.

Second, and even more important, FiSync moves money instantly in real time. That means when a customer sends money through FiSync using Dwolla's app, the money is immediately available in the recipient's account.

"The cost, the fraud and the lag times associated with moving money are systemic problems that are strangling innovation in our economy," said Dwolla founder and CEO Ben Milne in announcing the news. "To solve these issues, we turned our focus on fixing the bottom of the payment stack — a 40-year-old structure that moves $33.9 trillion dollars — and created FiSync, a simpler way to move money from Point A to Point B."

The "40-year-old structure" Milne referred to is the Automated Clearing House, a network that handles all kinds of bank-to-bank funds transfers such as bill payments and direct deposit. The network, while solid and reliable, has one big drawback: a delay of several days between the time a payment is made and when it actually shows up in a bank account.

The way ACH works is that it basically makes a promise that the money will be available when the sending and receiving banks settle up. This means the "real" money, money to be used for other things, has to wait on the FIs to batch all those promises and send them for settlement. And this can vary depending upon the banks and whether or not there's a weekend or holiday to contend with.

The delay in money settlement can have some serious consequences, especially for anyone concerned about cash flow and bill payments — say, a small business. Dwolla believes that finding a better, faster and cheaper way to move funds is crucial to helping those businesses thrive. What's more, in helping small businesses thrive, Dwolla believes it can help the entire economy thrive.

"Lack of real-time movement is holding back a lot of innovation," said Jordan Lampe, head of communications for Dwolla, in a call with Mobile Payments Today. Lampe said liquidity is a serious issue, and waiting for days to get money stifles a company's ability to compete.

To spur adoption, Dwolla is giving FIs free access to its FiSync platform (which makes its money by charging customers 25 cents to send funds over $10). According to Lampe, it's already getting plenty of attention from other banks looking at deploying the service, so much so that it's actually having to throttling access. (Lampe couldn't divulge which banks are in talks with Dwolla at this point, but he said more would be coming on line in the coming months.)

Like any true believer in a cause, Dwolla thinks it's in the right time and place to effect big changes. And the company may be right. There is a growing sense in the payments community that current methods for connecting payers and payees may not be up to the task ahead of them in an interconnected, multi-channel world.

"Now is as good a time as any other to make this happen," said Cherian Abraham, principal at Drop Labs and an expert on the growing mobile payment space. "[Dwolla has] lit the fuse, and the overall energy in mobile payments will benefit them."

That isn't to say that Dwolla is certain to succeed, Abraham said, adding that the company still faces an uphill battle to change the way banks behave. They also still have to ensure that they can address issues of fraud and security, he said.

But If Dwolla can get a snowball effect going and get a bank or two on board, Abraham predicted there will be more of a case for what Dwolla is offering.

"They've made all the right decisions and they've got the timing right," he said.

The folks at Dwolla are aware of the obstacles they're facing. Lampe admitted that Dwolla's goal to replace a 40-year-old, ubiquitous system is indeed ambitious. "How many companies do you know that want to take on a $34 trillion industry?" he asked.

Still, Lampe said changes in the way banks transfer funds are all but assured at this point — mainly because it's now clear that there are better ways to handle the task. "We are looking to fundamentally change the way money is exchanged in five to 10 years," Lampe said. "Whether it's us or someone else, it will be done this way."

For more stories like this, visit the Money Transfer/P2P research center.

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User Comments – Give us your opinion!
  • Philip Cohen
    Hmmm, now that Dwolla is working its "magic", how and when do the various banks settle?
  • Larry De Palma
    Snore. Everyone has a 'new' and 'revolutionary' way to make payments.

    If this concept had any chance of succeeding, PayPal (which is exponentially more capitalized than Dwolla) would've done this ages ago, since the key banking players would be much more amenable to making the programmatic enhancements required to support this.

    BofA, JPMC and Wells (the holders of the major % of DDAs) will not allow this entrant into their systems, since they are working on their own real-time P2P network.

    This will be good if you want to transfer money from Iowa to Nebraska using the CO-OP network...
  • James Wester

    I'd agree that hype is ever-present in payments these days, but here are a couple of things to think about:

    First, from the article -- "We are looking to fundamentally change the way money is exchanged in five to 10 years," Lampe said. "Whether it's us or someone else, it will be done this way."

    The fact that three of the big four are working on ClearXchange to do real-time transfers actually supports the concept and the idea that SOMEONE will make a "better" ACH. In other words, everyone seems to know that ACH is a hindrance on electronic commerce. Billions of dollars are constantly in limbo every day.

    Who's going to be that someone? PayPal DIDN'T build a new network and relies on other rails with all their issues. And while CXC does cover half of all U.S. DDAs, the three member banks control when settlement occurs. It's not really "real-time." For lack of a better description, it's just a "new" ACH. (In fact, CXC tells potential bank partners: "You [meaning: the bank] control the movement of funds to and from your customer accounts.") CXC's convenience is that customers can send money to and from emails and mobile phone numbers, not speed of settlement.

    Will it be Dwolla? Unknown. But they're argument is that they HAVE built a new network from the ground up that benefits senders and receivers, not banks. The benefit to banks is that it's free to access (and eventually, their customers will demand it.

    So it seems the big question isn't whether the idea itself is revolutionary, since we all seem to know ACH isn't the best solution for ever-increasing amounts of electronic commerce, it's whether Dwolla is positioned to become that new network.

    They've only got some Iowans now. But everyone has to start somewhere, right?

    Thanks so much for the comments! I look forward to more!

    James Wester
  • Philip Cohen
    "hype is ever-present in payments these days"

    Never a truer word was said. There is enogh hot air being expended, by PreyPal alone, to get us all into sub orbital space; still, the eBay Dept od Spin has to try to keep the otherwise atrophying eBay afloat somehow; I'm still trying to figure out how they are managing to inflate the eBay stock price ...
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