When I was browsing the news this morning, I came across a press release and a bunch of blog posts about Dwolla, a mobile payments start-up out of Des Moines, IA, which has just reached $1 million in daily transaction volume. Dwolla is rightly proud with the achievement, especially considering, as many have already pointed out, that it had taken them a shorter amount of time to get there than it took the vastly better publicized and capitalized Square.
Dwolla is different from the Squares of the (mobile payments) world in that it facilitates electronic cash payments, rather than credit and debit card transactions and I wanted to take a look at how viable its business model is.
How Dwolla Works
Before I get going, I have to say that it was really difficult to get a clear picture of exactly how Dwolla works from visiting the start-up’s website. It could just be me, but I think that the company could do a much better job, and a favor to people like me, if they created a “How Dwolla Works” page and placed a link to it on their home page.
Still, after some digging through the website, I was able to paint a somewhat complete picture (I think) and here it is. Dwolla provides its users with the ability to make e-commerce and person-to-person (P2P) payments directly from their bank accounts.
Online payments can be made to merchants who have signed up for Dwolla and P2P money transfers can be completed only after the recipient creates a Dwolla account (this was something that I never saw explicitly stated on the website), much like how PayPal works. You can link Dwolla to your Facebook and Twitter accounts and send money to your friends there. Dwolla transactions cost $0.25, paid by the recipient.
Most, if not all, of the articles I’ve read about Dwolla praise the start-up as one offering an innovative service and predict a bright future for it. I regret to say that I disagree with both of these assessments. Let me explain.
On the innovation claim there are two aspects of Dwolla’s service that need to be addressed separately. Firstly, online 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?
Secondly, P2P money transfers have long been provided to consumers by the likes of PayPal, admittedly at a higher cost than Dwolla. However, Bank of America allows me to make money transfers to other BofA customers and make payments for free. Most other banks offer the same service. Moreover, JPMorgan Chase, Bank of America and Wells Fargo have opened up their systems by creating a joint venture, called clearXchange, that will make intra-bank P2P transfers easier and faster. I think Dwolla will have a very hard time competing with such platforms, as they evolve.
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.
Image credit: Dwolla.com.