by Alyson Shontell –
There’s a tiny 12-person startup churning out of Des Moines, Iowa.
Dwolla was founded by 28-year-old Ben Milne; it’s an innovative online payment system that sidesteps credit cards completely.
Milne has no finance background yet his little operation is moving between $30 and $50 million per month; it’s on track to move more than $350 million in the next year.
Unlike PayPal, Dwolla doesn’t take a percentage of the transaction. It only asks for $0.25 whether it’s moving $1 or $1,000.
We interviewed Milne about how he is building a credit card killer and Square rival from the middle of the nation where VCs and press are scarce.
BI: We hear you’re making credit card companies angry. How are you doing that?
Ben Milne: Ultimately we’re trying to build the next Visa, not the next PayPal. We’re building a human network based on how we think the future of payments will work. The current model needs to be blown up.
Dwolla started out of my old company. I owned a speaker manufacturing company and we sold everything directly through a website. I got really obsessed with interchange fees and how not to pay them. Every time a merchant gets paid with a credit card they have to give up a percentage. In my case, I was losing $55,000 a year to credit card companies. I felt like they were stealing from me — I was getting paid and somebody was taking money out of my pocket.
So I thought, how do I get paid through a website without paying credit card fees? We pitched a bank, and amazingly enough they said, “We’ll give it a shot.”
That was three years ago, so we’ve been working on the project for a really long time. In December of last year we figured out how to legally do what we do.
How many transactions are you doing?
The average transaction volume for Dwolla is right around $500 dollars. We move between $30 and $50 million per month.
What’s your story?
I’m 28. I started my first company, Elemental Design, when I was 18. I dropped out of University of Northern Iowa and built that.
I started college because I thought that’s where I was supposed to go. I applied to one college, I got in, went, and realized it wasn’t for me. I had customers so I stopped going to class.
We grew that company from a $1,200 investment to over one million in revenue in four years with three or four people and without outside investment. The company was running itself and I wanted to work on another project.
You don’t have a finance background and yet you built Dwolla?
It’s been helpful in some strange ways. I think the first financial institution we went into only listened to me for entertainment. They let me get in to pitch the full executive team at the bank.
I don’t look like a banker, they knew I didn’t have a banking background. They actually agreed to work with Dwolla after two hours of arguing with me and me scribbling on a whiteboard about how the whole thing could work.
Had I been more typical, maybe they wouldn’t have listened to me. In that respect, I think that not knowing how the mechanics worked was good — we just knew the way we wanted them to work.
What did you do for the first two years when Dwolla wasn’t technically legal?
Well it was legal, we just couldn’t operate outside of Iowa. For the first two years we built out the platform. We did a sh*tload of testing on a small scale because legally we couldn’t launch Dwolla nationwide. We spent two years inside of Iowa fine-tuning Dwolla with the financial institutions, building out some of the initial models, and trying to figure out how to legally do what we do.
How’d you find a legal loophole?
Moving money is an exceptionally regulated business. We’re in Iowa, which is sort of conservative — I don’t know if that helped us or hurt us, but in the long term I think it helped us. We figured to do this legally, we had two options: we could take in a tremendous amount of money and go out and get licenses, which is how most people do it. But we didn’t have access to that kind of capital here.
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How does Dwolla work and how is it different from PayPal?
With Dwolla, payments are made directly from your bank account. No credit or debit cards are allowed. And because they don’t exist in the system, we don’t have to bring the fees into the system.
You can spend any amount of money and when you do that, the person on the other end doesn’t have to pay 1, 2, 3 or 4%. They only pay $0.25 a transaction, which is especially helpful when it’s $1,000, $2,000 or $5,000 transactions. Obviously PayPal becomes very cost prohibitive with those larger transactions.
The biggest difference between ideas like this and a PayPal — and PayPal is a phenomenal idea, Square is too — is that those are built on top of networks like Visa and MasterCard. We’re building our own.
Can users only send money to Dwolla members?
No, you can send money to anyone. Only the person sending it has to have a Dwolla account to initiate the transaction. The person receiving it will have to sign up for an account, but we’ve been surprised at the conversion there. It’s worked relatively well. We leverage social networks really heavily as contact lists, which is one thing we do really different. You can send money with an email address or with a phone number, but the most popular way to do it is to connect to Facebook and type in a friend’s name.
We think, in the long term, sending money should be as easy and effortless as finding a friend on Facebook. That’s really a behavior we try to mimic when it comes to peer-to -eer payments. When someone does not have a Dwolla account, they get a wall post that says, “You’ve got money.” If a friend sent that to you and it was their name and their face, you would have a different emotional connection to that than an arbitrary email from hellokitten32@aol.com. It’s a totally different interaction and one that’s been really helpful for us in converting users into the system.
What kind of purchases and money transfers is Dwolla being used for?
We do pretty well in B2B; 11% of our business is person-to-person, and the large majority is business-to-business, consumer-to-business, and business-to-consumer. The platform was originally built for taking in payments through websites, and we have APIs that allow you to do that. We haven’t experienced the scale on those quite yet.
Where we’ve seen a ton of transactions right now is with people paying monthly rent. If I’m a landlord and I want to collect it, taking a credit card payment means missing out on 3% of an $1800 charge. Dwolla is $0.25 cents.
The average Dwolla transaction is right around $500. PayPal takes 2.9% plus $.30 a transaction.
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Why hasn’t anyone side-stepped the credit card companies before?
I think a lot of it is timing and luck. And a little bit of getting your foot in the door. One of our investors is a $1.8 billion financial institution. That’s atypical anywhere, let alone in Iowa. Having them on board allowed us to get into a lot of rooms.
We serve everyone from the landlord taking in one payment to the individual buying a coffee with their cellphone, to billion-dollar corporations. Because we’re so atypical and look at mobile payments differently, we got in the room with the Federal Reserve and the U.S. Treasury who allowed us to have a conversation, not only from a corporate standpoint, but from a government monetary distribution standpoint.
All banks are connected by one ACH system. Credit card companies utilize that same system to pay off your credit card charges. Banks internally set along that same system to move money in their own banks. This system in its own right is riddled with flaws — tons of fraud issues and waste and delays. If you’ve ever had a payment take a few days to clear, its because they’re waiting on that ACH system.
We want to fix that system between the banks, take out the delays and make it instant. If we can create this ubiquitous cash layer of distribution between consumers and merchants and developers and financial institutions, that actually fixes the problem.
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.
Since you’re hooked up to bank accounts, users don’t have to have money in a Dwolla account to make a transfer?
You can hold money inside of Dwolla but you don’t have to. We’re finding a lot of consumers want to hold it there. There is actually a positive average balance inside of Dwolla for each consumer. We also have businesses that use Dwolla to do payroll, so they’ll keep a balance in there to cover the cost.
You could have an account of $0 in Dwolla and there would be no fee?
The only fee would be if someone paid you. We take a quarter. We really want that quarter. It’s all we want!
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HT: The Fiscal Times (read full article)
