clearXchange vs. Dwolla Revisited

clearXchange vs. Dwolla Revisited

Exactly a year after JPMorgan Chase, Bank of America and Wells Fargo formed clearXchange, a cross-bank person-to-person (P2P) payment platform, Wells Fargo has launched the first service that will be using the system. Send & Receive Money, as Wells’ service is called, enables customers to send money to other Wells Fargo and Bank of America customers using either the recipient’s email address or mobile phone number.

Send & Receive Money is of course a direct challenge to PayPal, but is a much bigger threat to Dwolla, a Des Moines-based provider of low-cost P2P money transfers, whose business model we have previously reviewed on this blog. We received strong pushback when we concluded that Dwolla simply stood no chance as a stand-alone P2P service provider, because the banks would eventually be facilitating P2P payments for free. And sure enough, that is now a reality. A couple of months ago Barclays became the first big bank to launch a free P2P mobile payments service, called Pingit, and now its American cousins are joining in. As I see it, Dwolla’s position is becoming ever more untenable.

Wells Fargo’s Send & Receive Money

Here is how Wells Fargo’s P2P platform has evolved since its inception nine years ago:

Wells Fargo customers have been able to use an account number to make transfers to each other online since 2003. The service was extended through the mobile banking URL in 2007, made available on new mobile banking applications for the iPhone and iPod touch in 2009, and on new applications for Android, BlackBerry and Palm in 2010.

Now Send & Receive Money allows everyone with a Wells Fargo checking or savings account to send money to another customer of the San Francisco-based bank or to a Bank of America account holder, without having to know the recipient’s account number and for free. Transfers to other Wells customers take up to one day and to BofA customers – up to three days. The bank tells us that transfers to other banks will be made available over time.

clearXchange vs. Dwolla

I don’t think that Wells’ announcement changes anything. We’ve known for a year that it was coming, just as we know today that pretty soon most big banks and many smaller ones will be connected through clearXchange or some other platform to enable their customers to make money transfers among themselves for free. And I just don’t see what Dwolla can possibly do to remain competitive. They’ve been forced to cut prices and now charge recipients of payments under $10 precisely zero. But they can only cut so much and therein lies Dwolla’s problem.

See, Dwolla derives all of its revenue from the fees it charges for the processing of the money transfers among its users. That’s its business model. The banks, on the other hand, don’t have to charge their customers for any of these P2P transfers. They can afford to offer the service as a free add-on to their customers’ checking accounts and evidently that is the path they have chosen to take. Dwolla’s advantage is that it makes the funds immediately available into the recipients’ accounts, whereas with clearXchange funding can take up to three days. But is that a big enough competitive advantage, big enough to justify setting up yet another bank-like account? I don’t think it is.

Regarding Dwolla’s use for online payments, I think what we wrote a year ago is still very much relevant:

[O]nline payments using one’s checking account have been available pretty much since the dawn of the e-commerce. All you have to do is provide your debit card information at the checkout and the payment is done. Moreover, with the new limit on debit interchange fees, direct debit card acceptance would cost merchants about the same as what Dwolla charges. So why integrate yet another payment service into your merchant account, if you already have the capability it offers?

Why indeed? The debit fee limit is now a fact of life and has cut the average cost of accepting debit cards to $0.24 per transaction, less than what Dwolla charges. Moreover, e-commerce websites have been able to accept e-checks very cheaply for as long as they’ve been able to take cards. So what is it that Dwolla can offer that is better or cheaper than what e-commerce merchants already have?

The Takeaway

I’ve always been skeptical about Dwolla’s prospects. It has been obvious to me since the first time I looked at its business model that it was not viable in the long run. I thought that the company’s best way out would have been to lend its platform to as many banks as it could sign up and become a technology provider to its bank clients, leaving the payment processing to them, which is what clearXchange was designed to do. Now I think that time is running out for Dwolla, but perhaps it could still be acquired by a bank, or a group of banks, which would use its platform to compete with clearXchange and if that were to pass, it wouldn’t necessarily be a bad exit for the company’s founders.

Image credit: YouTube / Dwolla.

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