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."
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