Visa, Mastercard Finds New Competitor From Des Moines?

Nov. 17, 2011 — -- A small company in Des Moines, Iowa, is hoping to give the major credit card networks a run for their money amid a consumer rebellion over bank fees.

Dwolla wants to shake the dominance of MasterCard and Visa over credit card networks by allowing people to move their money without high transaction fees.

Ben Milne, founder and CEO of Dwolla, said people and merchants pay billions of dollars a year for using a credit card or even an online payment system.

Online and mobile payment systems like PayPal and Square charge a percentage each time you make a transaction plus a small flat fee.

"There has not been a service that allowed people to exchange money without being paid a chunk of it," Milne said.

Milne launched Dwolla, a mash-up of the words "dollar" and "online," in 2008 in his home town of Des Moines. The company has 12 employees.

He said he conceived of the concept while running his last company, an online speaker retailer.

"All our money came from credit cards through our website," he said. "Fundamentally, I had a problem that. Just to get paid, we had to pay credit card networks $55,000 a year."

But with Dwolla, you only have to pay a flat 25 cents a transaction if you receive a payment, with no fees based on percentage. Users can go online and make payments or use an app on their iPhone or Android device. The company is also working to have retailers accept Dwolla payments in stores, with business owners in Des Moines leading the way.

In comparison, PayPal users pay a 2.9 percent transaction fee plus 30 cents to accept payments. Square, launched by Twitter co-founder Jack Dorsey, charges 2.75 percent when you swipe a card on the device. If you enter a credit card manually, your cost is 3.5 percent of the fund amount plus a 15-cent transaction fee.

Visa and MasterCard banks charge merchants an average credit card interchange fee of around 2 percent per transaction, according to the National Retail Federation.

While those percentages may seem nominal at first, they add up if you are moving large amounts of money.

U.S. retailers and consumers pay about $50 billion a year for these fees, triple the $16 billion charged when the federation began tracking the fee in 2001. The federation estimates the fees drive up the price of merchandise, costing the average U.S. household $427 a year, up from $159 in 2001.

The fees are lower for debit cards. The Durbin amendment of the Dodd-Frank Act capped fees banks charge merchants when customers make debit card purchases to about 21 cents. Before the amendment was implemented on Oct. 1, the average fee banks charged merchants was 44 cents per transaction.

Dwolla, is "still a very small service" with 50,000 users, Hilne said. But the company is on track to move $350 million this year. Dwolla's next goal is to move $1 billion in payments in a year. Then, after that, $2 billion, and so on.

Milne said a large majority -- 95 percent -- of current Dwolla users are consumers.

"Consumer-to-consumer transactions are pretty popular," he said. "There is a lot of ways you can exchange money with people."

Whether you are sending money to a friend for fantasy football or paying back someone for dinner, Milne said, people will save money when they receive money through Dwolla as opposed to the more expensive payment exchange systems.

Of course, some banks have free online transfers within the bank, but those are often limited by dollar amount or transactions per day. Transferring money to someone outside your bank usually requires an online account from a third party like PayPal, or a fee.

With banks trying to increase revenues through sneaky fees, consumers should be careful when transferring money through a teller. For example, if you are a Bank of America customer with an e-banking account, you get charged for the month if you speak to a bank teller. If a family member who is less technologically inclined wants to transfer money to your account through a teller face-to-face, you will be charged that teller fee.

By contrast, Dwolla, PayPal and Square market their simpler fee structures.

Milne said the company has no plans to distribute a physical, plastic card yet.

"We are trying to keep up with growth in our product, which is growing pretty quickly," he said.