I’ve wanted to write about this subject for quite some time and this morning I was given the opportunity I’ve been waiting for. Last year we received a lot of pushback for our post about Dwolla, a person-to-person (P2P) mobile payments provider. Many readers didn’t like our conclusion that the start-up simply stood no chance as a stand-alone service, because the big banks would, sooner rather than later, come up with a very similar service and would be offering it for free.
Well, Barclays, a big British bank, has just launched Pingit — a P2P mobile payments service that allows Britons to send and receive money through their phones, for free. Consumers without a Barclays account can only receive payments, but the bank promises that they would “soon be able to send money too.” I don’t know about you, but that sounds to me like a description of what Dwolla does, up to the pricing thing. And if Barclays is doing it, its American cousins will be doing it soon enough too.
Let me re-post our take on Dwolla’s prospects, as we saw them in July of last year:
But it is something else that makes me really question the future of Dwolla and similar services and curiously I haven’t read about it anywhere – the fees they charge. At $0.25 per transaction, you would need many millions of them to make any kind of profit that would justify the effort. A million transactions, which could be what the start-up is currently processing monthly, only translate into $250,000 in revenues. The problem is that Dwolla cannot charge more than that; banks are doing it for free!
I am quite skeptical about Dwolla’s prospects. I just don’t think that its business model, in its present form, would allow the start-up to achieve any significant scale. Their only chance, as I see it, is to quickly sign up as many banks as they can (Dwolla says they have currently signed up 15) and let them use their technology. The problem is that banks are already developing their own system and JPMorgan Chase, Bank of America and Wells Fargo have said that clearXchange will be open to other banks. To make matters worse for Dwolla, PayPal is spending heavily on its own P2P platform and it already has built a huge customer base and online presence.
So I think that the start-up should prepare itself for a long, hard slog.
I don’t think that I would’ve changed a word in the above paragraphs, if I had to write them with the benefit of today’s perspective.
Many readers of our original Dwolla post repeatedly told us how great the company’s service was and I have no reason to doubt that assertion. In fact, we did congratulate the start-up on their fast growth, especially considering the fact that they reached $1 million in daily transaction volume in a shorter amount of time than it took the far-better funded and publicized Square. That was a great achievement and ours was not a backhanded compliment.
All that, however, doesn’t take anything away from the fact that Dwolla, unlike Square, has set out to compete in a sector that banks care very much about. What makes Square so successful is not its technology, which has been easily replicated by Intuit GoPayment and many others, but rather its business model. See, before Square only businesses could accept credit cards for payment. Banks simply didn’t offer the service to consumers. Jack Dorsey’s company changed all that and was the first one to enable everyone to take cards.
P2P bank transfers, which are what Dwolla facilitates, are different. This is bank-backyard territory and banks have been providing various such services for a long time and for free, although transfers have so far only been possible between customers of the same bank. Dwolla, of course, took it a step further by facilitating P2P transfers between different banks and by funding the recipient’s account instantaneously. But that’s not enough of a competitive advantage, as the Barclays example makes clear.
So Dwolla is still facing an uphill climb, only that the company now has less time to get to the top. But what would a successful climb look like for Dwolla? Last year we contended that their only chance was to sign up as many banks as they could and let them use their platform. In essence, that would turn them into a technology company, not a payments one.
I still think that this would be the best, and very possibly the only positive, outcome for the start-up. Dwolla could be doing that as an independent company or, which is the much more likely scenario, it could be acquired by a bank, which would use its system. That would not necessarily be a bad exit for the Dwolla guys. In fact, if they time it right, it could be a very lucrative one indeed.
Image credit: Barclays.