Buddy Can You Spare a Dwolla?

December 30, 2010

A start-up with backing from a group of credit unions is placing a bet on the market for micro-payments with the introduction of a new person-to-person money transfer service accessible via the Web and so-callled smart phones.

The folks behind Dwolla (rhymes with dollar if you drop the r) think they have a good shot at becoming the alternative to cash for online stores and social networks, and for small-dollar exchanges between friends and family members. And it won't matter whether recipients have Dwolla accounts or not.

"In today's electronic world, we view money as pixels on a computer screen, not inked numbers in the back of a checkbook or on a bank account statement," said the company's founder and CEO, Ben Milne, in a recent statement announcing the nationwide roll-out of Dwolla. "What we've done is created a platform that is more in line with our current generation's behavior when it comes to handling and exchanging cash."

Rather than rely on existing payment networks (think credit and debit cards) Dwolla integrates with social networks like FaceBook and Twitter by way of application programming interfaces (APIs). Money transfers are completed using the automated clearing house (ACH), an inter-bank network that moves transactions between bank accounts at a fraction of the cost of Visa, MasterCard and even PayPal.

Dwolla also works with smart phone devices, and other emerging "frictionless payment hardware" that can mimic interactions performed at its Web site, hte company explained.

According to Milne, the idea for Dwolla grew from consumer and merchant frustration over the lack of online payment options that worked like cash. And the company intends for Dwolla to be a cheaper alternative for merchants than card acceptance for small-dollar purchases. (The cost to online merchants of accepting a bank-issued credit card can be as much as 5% of the purchase total under current fee structures.)

Dwolla is backed, financially and technologically by The Members Group (TMG), which is owned by a group of credit unions in Iowa, and the Veridian Group, a credit union service organization owned by Veridian Credit Union (originally the John Deere Employees Credit Union), in Waterloo, Iowa.

"Dwolla is the first cash platform - since the dollar bill - that will allow consumers as well as organizations to significantly reduce the amount of fees they're incurring for sending money electronically, while at the same time taking advantage of the social networks as a new medium for people to share funds." said Milne.

"The social integration of the Dwolla platform is based on the concept that we - as consumers - are more likley to partake in transactions with those we know or entitites we like," explained Milne.

Dwolla, which, until now was available only in California and Iowa, already has "several thousand users" who, combined, have exchanged about $3 million in payments, and saved merchants about $100,000 in interchange and other transaction fees, the company claims.

Americans borrow about $40 billion a year from payday lenders

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