This article was posted a few days ago. I'm a competitor.
Having built the same kind of company from the ground up, I have good reason to suspect that most of Dwolla's transaction volume does not come from mobile payments, if the $350 million / year number is accurate in the first place. Some revenue comes from Bitcoin transactions, which the article doesn't mention, creating the false impression that Dwolla is already a mobile payments juggernaut. It isn't.
Dwolla does not integrate with any point of sale systems to the best of my knowledge, which means that the title of this article is basically fantasy.
Dwolla is also breaking California law by operating in a manner that allows California users to use the service without a money transmission license. (Having an investor that processes transactions for banks does not make Dwolla exempt. Anyone who doubts this should read the list of exemptions: http://www.leginfo.ca.gov/cgi-bin/displaycode?section=fin.... If Dwolla were considered a bank it wouldn't need a money transmission license in Iowa, which it has.)
I'm not a fan of that law, so as of yesterday I've sued the State of California over it.
Dude, give them some credit for moving $1M per day without even integrating with POS.
You CANNOT build a billion dollar company without breaking laws knowingly or unknowingly.
EDIT: Please don't take this as an insult, but you seem to have a negative attitude when it comes to competitors. I noticed this a few times. This makes you sound jealous (maybe you aren't, idk) and devalues your comments.
EDIT2: And they have done this with $1.3 M in funding, and 12 people. Hats Off. Hats Off.
Actually, I'm not surprised a company like this has started in Des Moines. Contrary to Milne's "location is just an excuse", location is everything for a start up.
Des Moines' little secret is that it's a major "back-office" financial-services center--banking, insurance, mortgages, annuities, etc. Wells Fargo, Aviva, Principal Financial and others have either their corporate or divisional HQ's there.
There's also a heavy marketing and publishing cluster there (including a couple of sizable companies owned by Hearst--which is also the parent of SFGate). But that's tangential...maybe.
Another reason is Des Moines is small and homogenous enough for people in the financial services community to know each other. And to influence/be more easily influenced.
These reasons--and others--are why I completely disagree with Milne's
statement that "location is just an excuse". It's not. Start ups need the proper environment to take root and grow--infrastructure, people (domain experts and technical), and "political" protection.
The fact of the matter is, Dwolla probably would not have survived this long in the Valley, Wall Street, Route 1/128, or Austin. It is a financial-services-oriented start up in a small, but highly concentrated, financial-services town where someone high up on the local totem pole liked what they saw.
Great points. I came to Omaha from Austin, and have found that it is orders of magnitudes easier to get noticed in Omaha. There is just less noise. As the industry evolves and grows here, that effect will begin to disappear. For now, it's a benefit that local startups need to appreciate and take advantage of.
No hate -I'm in Omaha. And coming from Austin, it is a whole 'nother world trying to find developers who are willing to accept the startup lifestyle. In Austin, they complained about how "easy" it is in the Valley. In Omaha, they complain about how "easy" it is in Austin. Bottom line is you gotta make it work no matter where you are, but I'm pretty impressed with Dwolla's progress given the state of the industry in the Midwest. Not a dig, just an assessment.
I got here a year or so ago, and I've been pleasantly surprised at the level of activity in the Midwest, but it's got a long way to go in terms of depth and breadth of skill available to draw upon.
I follow Bitcoins, in the matter that some people might follow Nascar crashes, and it is not credible to me that Dwolla is primarily getting those volumes on Bitcoin transactions. First, the Bitcoin community is, on the observable evidence, not large enough to support them. Second, my understanding is Dwolla belatedly discovered the value of chargebacks, which bit the Bitcoiners because of all the obvious reasons.
What patio11 is saying is that Dwolla underestimated the scam potential by accepting payments with are rechargeable and giving non-rechargeable "digital cash" in return.
Basics of the scam: Deposit in Dwolla, buy Bitcoins on an exchange, send bitcoins to your own wallet, chargeback Dwolla deposit.
A couple of months ago TradeHill, the second largest bitcoin exchange, discovered Dwolla billed them $30K in chargebacks despite their claims of never doing that.
It's this Dwolla issue that stopped the influx of new money into Bitcoin and now the price is 90% down.
This is a key problem for growing any kind of digital cash like economy: somebody needs to take the risk of turning chargeback-money (USD) into cash-like money (bitcoin), or you need to have a network to somehow take physical cash.
Or it's not USD that is chargeback, but the nature of digital transaction for the current state. If you go to a store and buy a can of soda with bills and coins, you don't really get a chargeback without handing back the goods.
It just illustrate that online transactions should be chargeback-able to protect consumers from fraud. Bitcoin just doesn't cut it.
But if I want to send money to a family member (as an "online transaction"), and I have concluded that I do not need chargeback protection, why should I have to pay an extra fee to cover all those people who DO need it?
I believe there's a place for non-chargeback online transactions. Just as there's a place for non-chargeback in-person transactions (i.e. CASH).
I'm from Des Moines and know a couple of people that work at Dwolla. I haven't heard anything about Dwolla doing a lot (if any) bitcoin transactions. Do you have a source on that?
Dwolla has an API so any point of sale system can integrate with it if they so choose, but I believe that most retail locations that accept Dwolla either check the dwolla website, iphone or androids apps for incoming payments.
Lawyers are expensive and in my experience do not provide value commensurate with the expense.
The underlying issues here are of national interest and involve a complex regulatory regime including the Department of the Treasury, the Federal Reserve, the White House, Congress, and state regulators. There are a lot of people who need to know what's going on.
Sorry but you're quite insane. Well maybe not insane, by certainly an egotistical nutjob. Just randomly cc'ing organizations takes away any credibility that you may have had (which wasn't much after not using a lawyer for a case like this). If you think you can win this without a lawyer you're completely delusional.
Also, isn't working on this taking away time to be working on your startup? Or is this just some dumb promotional stunt?
EDIT: Your filings against Airbnb, Facebook, Stanford, USC, etc... shows that you have lost your grip on reality. Do you really think thats going to help or just piss people off?
Aren't you the same guy who was claiming that Facebook ripped you off? How about you actually create something that people want to use, rather than complaining about everyone around you.
Don't you need to be a lawyer in order to represent a corporation in a court filing? See United States District Court, Northern District, Local Rule 3-9 (b):
Corporation or Other Entity. A corporation, unincorporated association, partnership
or other such entity may appear only through a member of the bar of this Court.
My understanding is that if a California resident signs up for a service with a company in Iowa that has no California presence, that becomes interstate commerce. According to the Constitution and case law dating back to the 1800s (largely established by mail order companies), California does not have the right to regulate interstate commerce. Even when one end of that transaction is in California.
That is, in fact, at the heart of the whole sales tax issue with Amazon that has been in the news. By California state law, sales tax is owed, but California can't regulate what Amazon, an out of state company, does. Only Congress has that authority. (It looks like they may do it as well.)
I am not a lawyer, and could be wrong. If you want actual legal advice, you need to consult a lawyer. But this is my understanding.
California has the constitutional right to regulate commerce within its borders. When a California resident in California signs up for a service, even a service provided by a company in another state, California law applies.
In this case particular case, California exceeded its constitutional bounds by passing a law that claims to regulate commerce nationwide. Whether or not you agree with that, the exemption order that my company received proves the interpretation.
Either way, Dwolla is not registered as a money transmitter in California, has not applied for a license, is doing business with California residents in the state, and is in violation of the law as a result.
New York used to have a physical presence requirement as part of its money transmission statute; those companies without a physical presence in the state were not required to obtain a license. As of September 30, 2011, that changed: all money transmitters with New York customers must obtain licenses, whether or not there is a physical presence. With the advent of the internet, states are realizing that "presence" does not necessarily have to be physical in order to claim tax revenues or license fee revenues.
Your company exists in California, making it subject to California law; thus, any interaction between your company and the state of California doesn't prove anything. I still consider the law awful, but that aspect of it unfortunately does not exceed the scope of state law.
Unfortunately, until California makes the mistake of attempting to go after a non-California company with this law, the law won't get overturned on the grounds of regulating interstate commerce.
They can claim all the tax revenues and license fee revenues they like, but they'll find themselves sorely disappointed.
You don't need to issue a cease-and-desist to choke the life out of a company through clouded regulation such is the case w/ FaceCash. Aaron is obviously going to operate his company within the confines of California law and wasn't able to do so...
I'll be following the civil suit very closely. Best of luck.
The critical difference is that he has a California company that California is trying to regulate under California law. The company may still win on interstate commerce, but California is in a much stronger position than it is when trying to regulate an Iowa company.
In Germany (and most of europe) credit cards arent used very much. I can wire transfer money inside the country for free, i can pay in alot of Online Shops by direct debit who get the money directly from my bank account. In stores i use a card associated with my bank account (not a credit card) to pay which also lets the merchant get the money directly from my bank account.
I am suprised that the US doesnt have a similar system, no wonder everyone uses credit cards there. Thats also why i think Square wouldnt be very successfull over here.
I use my credit card for almost everything. Before I explain why, it's important to state that I pay my balances in full every month. Anyone who has a hard time doing so should not be using credit cards.
There are three reasons why I use my credit card so much (in order of importance to me):
1: It makes my finances much, much easier to manage. If I were using a debit card, I would have to track every transaction to the penny throughout the month in order to avoid overdrafts. Instead, I just keep a rough mental tally of my expenditures to make sure that I'm not living beyond my means. If my spending happens to get front-loaded on any particular month, no big deal: I've got another paycheck coming before the bill is due at the end of the month. With a debit card, I would have to manage my spending by pay period (twice a month) rather than billing cycle (once a month). Also, if I did happen to spend a little bit too much by accident, I'm looking at a few dollars (possibly even just a few cents) in finance charges, as opposed to a $20+ overdraft fee on every subsequent transaction.
2: I have a rewards credit card, so everything I buy gets me points. If you aren't using a rewards credit card, you're helping to pay for my rewards: the credit card companies generally charge the merchants higher transaction fees for purchases made with rewards cards (otherwise they would lose money on people like me who don't carry a balance). Merchants pass those costs on to customers by raising prices slightly. If you're not using a rewards card, you're paying those higher prices without reaping the benefits. Some merchants charge lower prices for cash, in which case I will usually pay cash because the savings are worth more than the points.
3: Because I pay my balance in full each month, I'm getting an interest-free loan from my bank each month. That money sits in my bank account accruing interest for anywhere from 1 to 30 days (depending on when I make the purchase). With interest rates as low as they currently are, I'm only making a few cents each month this way, but that's still money I wouldn't otherwise have.
How many of these reasons would also apply in Europe? I know that #1 does, but what about #2 and #3? There are plenty of reasons for not using credit cards, which I didn't really get into, but are there reasons that apply in Europe which don't apply in the US?
1: Well in my bankaccount I can overdraft with no problemes (I think there is a system how often and how much you can overdraft but I never hit that limit). I just have more then one account (there nicly bundeld in the ebanking system) on for everyday the other for safings. So keeping track of all this is nice because you always know what you have. With Credit Card I never know how much I will get at the end of the month.
2. I think there is something like that yes but I have the same thing for the normal bankaccount the send you some kind of points and you get cheaper entery to all kinds off stuff but I never really read that stuff, In some shops you can use these points as money and I use the points for that.
3. I don't know about that but good for you if you can get some free money. A Irish guy told me once every cent is a cent closer to the next Guinness.
You've highlighted an important cultural difference between USA and European banking. At least in the UK, I know that it's common to overdraw one's checking account as a form of short-term loan. In the US, overdrawing your checking account is a cardinal sin, and it will win you a fee of $20 to $30 PER TRANSACTION presented for payment while overdrawn.
A few years back, I had plane international tickets booked on Zoom. They went out of business between the buying and the flying. With a credit card, that was Visa's problem. If it had been a debit card, it would have been my $3000 problem, as customers were unsecured creditors.
#1 does not apply. If your balance goes below zero, you start paying interest. It's a pretty high rate (12-18% or so), but nothing that will get you into trouble as long as you top it up within a week or even a month. There are no other overdraft fees.
#2: I don't know, I've never encountered a reward card. They're certainly not common here, probably don't exist at all.
#3: You have a point there, but interest on simple current accounts (as opposed to savings accounts) is often zero percent here, certainly not much higher than 1% or so.
(I live in the Netherlands.)
A little clarification, based on Danish conditions but I assume it’s similar in other countries: You can’t just overdraw indefinitely, you have an authorized overdraft limit. For some people the limit may be zero so they’re not allowed to overdraw.
If you overdraw beyond this limit, you will pay a higher penalty rate and possibly also other fees. People with good credit can often negotiate a much lower rate than 12%.
1. What the hell man, you dont make enough to spend within your means and not have to worry if you run out of cash by the end of the month!? I only use a debit card, because I know that if I even have to consider by the end of the month how much I have on the bank account, I am then doing something seriously wrong, either spending too much or my job is not bringing in the cash. And in Europe, among my friends, it seems this works out very well. Make enough cash so you dont have to worry, not make enough cash AND risk collecting debt (even for a few days) just because what, you want to feel you always can buy everything? I dont understand american mentality.
2. I have a rewards debit card, everything I buy at certain places gives me points and discounts at said places. Never going into debt.
3. interest-free loan? Thats a funny concept, coming from a bank especially. Are you serious?
Simply put, in Europe you make enough cash so at the end of the month you dont ever have to consider you will be in debt unless you want to buy a ferrari on your way back from work. You collect points using your debit card. Debt is only used for fancy house/apartement, brand new car to show off, or starting a business. Never for spending.
Money in the bank is lazy money that's not earning it's keep. In the US many checking accounts don't even earn interest, at all. Extra money at the end of the month should go into a savings account. Once that grows to a certain size, excess money should go into investments.
Exactly. My checking account earns interest, but right now it's paltry because rates are so low. I have automatic transactions in place to move part of each paycheck into various savings and investment vehicles. I have calibrated it so that the only money left in my checking account is money that is budgeted to be spent that month. In my mind, that is what a checking account is for. In order to maximize the amount of money that's working for me instead of just sitting there, I have shaved it pretty close on the amount of money I leave in my checking account.
All of my regular bills (utilities, insurance, internet, cell phone, etc.) go on my credit card, and they are mostly clustered in the first part of the month. By using my credit card, I don't have to take that money out of my bank account until the end of the month, leaving me free to put money into savings and investment earlier in the month. If I were paying those bills directly out of my checking account, I would have to postpone my savings and investment transfers until later in the month to avoid going negative in my checking account.
> * Simply put, in Europe you make enough cash so at the end of the month you dont ever have to consider you will be in debt unless you want to buy a ferrari on your way back from work.*
I am from Europe and this is a completely ludicrous and false statement. If anything I would expect my USA counterparts to get way more salary after tax each month simply for the ridiculous taxes I am paying here (48%) plus we are paying some more taxes on ANYTHING we buy including food and water.
There is, however, a big difference between spending mentality - most Europeans shy away from going deep into debt and will typically only take loans on housing and cars but not to spend on luxury and entertainment; we by and large don't have that culture of ver-spending is ok and then keep shifting the debt from credit card to credit card. Matter of fact, I don't even know if VISA here would let me do that more than once...
Credit cards act as a buffer between steady salary income and patchy spending. Many people both in the US and Europe live within their means across the whole year, but take a big holiday or trip in the summer and spend more in one month than their usual disposable income. Having a credit card makes it easier to accommodate lumpy spending like that.
Food and water is cheaper in all the European countries I've been to -- all staple foods like milk, eggs, butter, vegetables, most meat, and most groceries, including bottled water (local!) which is $1.20 for a liter. Good bottled mineral water in the US costs $3-5 per liter, for example. I lived in Austria, spent lots of time in Germany, and have gone grocery shopping also in Italy and Portugal. (The UK is not "really" Europe in its laws, so I don't count it.)
I am Austrian (born and raised) and am working in Germany now and have been around Europe and the world - what are those subsidies for food you are talking about? You probably mean the Austrian government and the EU are subsidizing local farmers?
Buying local farmer products will vary in cost and when you go to the supermarkets (Lidl, Aldi and Hofer EXcluded, their "food" is absolutely horrible) and buy organic food it definitely is expensive; a bit less in Austria than in Germany though really good and very delicious food is scarce in Germany in comparison. I found the food you can buy in the US cheaper when you go by price per unit since packages are way bigger there and you have a ton more to choose from.
The US has debit cards. These act exactly like the card you describe. The problem with debit cards is that the money leaves your account immediately. I prefer having the CC buffer for when (notice not IF) the card number is stolen.
We don't have to use any kind of cards in Finland, and I think the situation is the same in Germany. I can directly pay a merchant and the money is transferred from my bank account without having a card at all.
I can use a credit card as well, or a debit card, but there really is no point to use them here.
It's surprising how far behind the U.S. is in this matter.
Have you traveled much? In lots of other countries, few stores take credit. Examples I've been to: Austria, Germany, Portugal, New Zealand… strangely enough the hot "latin" countries of Europe love credit cards, so it's easy peasy in Italy or Portugal. Also Finland, thankfully, because the amount of money you'd have to carry there'd be ridiculous.
Yes true. I always wonderd why americans used these stupid credit cards all the time.
We a better System atm but we should not relatx. They need to start making paying on the internet easier, Credit Cards and Paypal get alot of money by offering shitty servises. The Banks should get into this field and make it easy, safe and free.
A lot of us are actually using "virtual credit cards". They are like debit cards tied to a secondary account. You transfer money to said secondary account through the bank's webpage and then the credit-but-it's-actually-debit card is used to draw directly from it. This way, when you give your "credit" card online, even if it gets stolen, your main account is left unaffected.
Depends. In Ireland, credit cards are popular due to the main debit card not being accepted a lot abroad, since it's a small country, with a large economy next door that speaks the same language, it's common to buy things online from the UK, and so you'll need a credit card.
I wish him well on his endeavor because I'm not a fan of CC fees, but from a consumer standpoint, I don't see any benefits. CCs provide (i) a line of credit, (ii) fraud protection, and (iii) rewards/bonuses. All of these can be incredibly valuable, particularly (ii) - you never appreciate the no-liability fraud protection of a CC until you discover how difficult it is to deal with situations in which your bank account is affected.
If credit cards were not already the dominant electronic payment mechanism (i.e. VISA/MC were just starting like Dwolla is), Dwolla could possibly win out because businesses could refuse CC's. Not going to happen now, at least with regards to business-to-consumers. And I don't think most B2B transactions were conducted through CC's anyways.
They seem to be doing okay now, but I don't see any secret sauce that's going to make them anything more than a fringe player in the payments industry.
Yes. The fraud protection and line of credit are valuable to people but why is that linked to the processing fee and network? Those features are provided by the bank which only provide them irrespective of the network your purchases are processed on. That is the key.
The main advantage with a card is you can pay with it anywhere in the world. That kind of scale takes a lot of time to achieve and that is the reason the whole ecosystem is milking users.
It's easy to steal a card, but the card companies do pretty good fraud analysis and in any case, the card owner is never responsible for the fraudulent charges. Of course the cost of the fraud monitoring and insurance system are passed on to merchants and those who carry a balance. But if you don't carry a balance, there is no question that a rewards card is the best available payment mechanism. If you use something else, you are subsidizing those who use rewards cards.
Credit cards exist because people need a line of credit and debit cards seem to offer the same benefits as Dwolla, at a lower interchange rate for the merchant. The P2P feature is nice, ACH generally isn't used directly by individuals and wire transfers/EFTs can be quite expensive.
I wish someone would make a real alternative credit processing network, but there are so may laws and regulations, I wonder if it is even possible to ever have something like a simple 1% transaction charge.
No, credit cards exist because in 1978 the Supreme Court released an opinion allowing banks to export interest rates from one state to the other. So a bank in a state with a 25% interest rate cap could lend to a family in another state with a 12% interest rate cap. Politicians figured out quickly that if they bumped up the credit rate ceiling in their state that the financial institutions would come running, cash in hand.
Thirty(ish) years later we have an insidious industry that has saturated US culture with the poison of unsecured credit. They set up stands at colleges, snaring college freshmen with offers of free tee-shirts. They sponsor educational curriculums in grade schools advocating the use of credit cards. They even kick money to toy makers to include a little "Visa" or "Mastercard" with their products. They lobby Congress to pass laws making it harder for people who've dug themselves into a hole to include credit card debt in bankruptcy.
Credit is not necessary for modern living, despite the propaganda that permeates every piece of media to which we have access. I know this because 18 years ago I was that ignorant kid that wanted a free teeshirt. Ten years ago I quit using credit as a means of purchase, and six years ago I made my last monthly payment (with the notable exception of student loans, which is a rant for another day).
It's worse than that. The fact that credit is so easy means more people get themselves into debt. This means other services providers and lenders over rely on credit scores to determine whether they should accept new customers. It's cyclical.
I hear my friends talk about applying for multiple cards at the same time; cycling between cards so that a minimum spend is maintained and keeping and paying for cards that they don't need all so they can maintain a credit score. This is all guess work anyway, because no one really knows what contributes to this secret score.
The credit card companies must love the lack of transparency because instead of having to compete with each other and with other forms of payment we are now in a world where everyone believes they need to use multiple cards from multiple vendors. They use these cards even when they don't need or want to because of how much they fear their credit score dropping.
I'm 26 years old and I have never owned a credit card. Unless you really need to use a credit card as a short-term loan (which has always sounded to me like a really bad idea), they're just not necessary.
I am 29 years old. I thought the same thing as you until about age 25 when someone explained to me that CC's are a great way to build your credit rating. Since I avoided getting a credit card for so long...I had no credit and a very low credit rating! Whereas my wife who had had a CC for 10 years already had great credit. As a result, we had to utilize her credit rating when getting car loans/ home loans etc until my credit rating improved! Without good credit you can really get owned (bad loan rates) when pursuing a loan for any reason.
Why were you pursuing these loans in the first place?
Did you really need to get a car loan or did you just not have the cash to buy the car that you wanted. Could you have bought a little less car, paid cash, and have been payment free? Or could you have stayed in what you had, saved up, and then paid cash.
Same with a home. Did you need to buy a home? Or did you want to buy a home.
My point here isn't to indict your decision making, so please don't take my questioning as a personal attack.
My point is that this idea of borrowing money to make purchases has become so engrained in our thinking that very few people stop and question it.
There are cases where a clear need exists and sometimes the only way is to borrow money. I've been there. But the messages we hear on a daily basis don't talk about borrowing to satisfy needs; rather they serve to support the idea of borrowing to satisfy wants.
"Why were you pursuing these loans in the first place?"
As much as I wish I had $250K in the bank....
"Did you need to buy a home? Or did you want to buy a home."
LOL - as a married father of 2 kids in the Midwest I find this quite a funny comment. After renting for many years and dealing with horrible landlords ex: coming home on a cold winter Friday night to find my apartment bedroom with no windows with a little note stating "Be Back on Monday" - sleeping in a sleeping bag as a result.
So yeah, we "needed" our own home.
Also, given it is a great time to buy home (great rates, low prices, we got a tax credit in 2009 too) it felt like we would be stupid not to capitalize on purchasing a piece of earth/dwelling etc. Now we have a fat veggie garden, doing a remodel etc. Sometimes we regret it but overall it was the right decision for us.
Unless mammy and pappy or granny and grampy have the dough, or you sold your last company to Google, I'm guessing if you choose to buy a home, you will be calling your local loan officer and after the meeting wishing you had established some credit.
> LOL - as a married father of 2 kids in the Midwest I find this quite a funny comment. After renting for many years and dealing with horrible landlords ex: coming home on a cold winter Friday night to find my apartment bedroom with no windows with a little note stating "Be Back on Monday" - sleeping in a sleeping bag as a result.
> So yeah, we "needed" our own home.
This might be semantic wankery, but you didn't "need" to buy a house, you needed a place to live without a shitty landlord and - unfortunately, I would argue - the easiest, most feasible way to do that where you lived was buying a house.
Agreed. I have never been in debt in my life (not even student loans), and I really REALLY don't want to start now. That said, it still remains to be seen whether I can make enough money to afford to buy a house without a loan when the time comes that I decide that's what I want.
I'm completely with you on car loans (why pay so much interest for something that depreciates in value so quickly; you're losing out twice).
But for the majority of people it is simply not possible to buy a house without either making massive life changes or getting a loan. I don't think that becoming a life-long renter is a smart choice either.
For a fair number of people it is simply not possible to get their finances in order without massive life changes. Doesn't mean they shouldn't do it, for values of "shouldn't" such as "wouldn't be better off and happier, five or ten years down the road".
Firstly, there is a lot less security in renting. I can be evicted with a months notice. While I'm young that's part of the trade off but when I have a family I wouldn't appreciate that level of control over my life being in the hands of my landlord.
The second reason is the fact that when I fully own a house I will feel more financially secure. I won't have to worry about making rent payments for the next X years of my life and I'll feel better prepared for unforeseen circumstances. I might be able to achieve the same security by investing my money in other areas; but I much prefer investing in something tangible.
A mortgage is essentially a huge long-term bet, renting is a smaller, shorter term bet. The owner is betting that everything lines up nicely: the value of his property stays put or rises, nothing bad unexpectedly happens to the property, undesirable people don't move in around it, a whole-sector bubble doesn't pop. As a renter, there is no commitment: if the house is outdated you can move to a newer one with far less hassle; you don't have to worry about cost of maintenance; if you move during a bubble you can move once again when the bubble pops and pay less. The owner may end up with a property in 20 years if everything goes well, but a renter will never be underwater.
It actually makes sense. You're thinking of credit rating like it should be a blacklisting system, penalizing people who abuse it. But instead it's a whitelisting system, giving more privileges to people that have demonstrated trustworthiness. If you never play the game to begin with, then you have no credit rating, and therefore nobody knows if they can trust you.
A while back I interned with a company called Rapleaf that was trying to do the same thing for the internet, by tracking your social footprint (based on your email), figuring out information about you and, more interestingly, how long that information has been on the internet, as well as figuring out your social graph. I'm not quite sure if this is still the same stuff they're doing these days (they may be focused more on just providing data about people rather than providing "trustworthiness"), but at the time the idea was the longer someone's identity has been on the internet, and the more trusted friends they have, the more trustworthy they were. The example as to why this would be useful is a photo sharing site. If you build a new site that allows people to upload photos, you're going to need to impose a cap on the number/size of photos, or you'll very quickly end up being used as a storage provider for porn sites. But if you have a way of rating the trustworthiness of a new sign-up, you can offer them much more space because you're pretty sure they're not trying to use your site improperly. A blacklisting mechanism would be completely useless, because people would just create new accounts to get around it. But a whitelisting mechanism completely prevents that.
Like I said, I'm not sure if Rapleaf is interested in the trustworthiness thing anymore. I suspect they've found that simply selling information about people is a lot more lucrative. But the original idea was and still is a worthwhile concept.
The optimal way to play any "reputation" system is to build up an exemplary rating until you've unlocked all the "trusted-people-only" privileges, then suddenly exploit them all at once and disappear. In the case of credit ratings, this means being an exemplary debtor until one day you're trusted with a huge loan and you default.
This clearly still happens. It's a fundamental fact about how debts work and it's a central element in many confidence tricks (for example pyramid schemes). So credit ratings only benefit the lenders if the amount they save on loans to suboptimal players who default at random exceeds the amount they lose to organized people who exploit the system.
Credit cards are incredibly useful for two reasons, IMHO.
1. It's like having a proxy between your actual accounts and your purchasing. A stolen credit card is annoying and easy to rectify. A stolen debit card is terrifying.
2. Sometimes in life, an expense arises that exceeds both income and savings. When this happens, we either pay with credit (of some kind), we don't meet our financial responsibilities, or we go without. Sometimes the best option is to go without. When that is not possible, the credit card is a good answer. Pay off your balance responsibly and as quickly as possible and either save more in the future or be prepared to pay interest again.
If you travel and use hotels and rental cars, credit cards are very much a benefit. These companies insist on credit cards or require you to put onerous deposits and sometimes will refuse cash or debit cards outright. Airlines seem similar for their preference for credit cards. Also most of the benefits from credit cards are travel related. Like rental car collision insurance, travel insurance, etc if you use the credit card.
For example, our business requires that I travel all over the US and I use a debit card exclusively. Never have a problem with the airlines, hotels, or renting cars, but that's because we've taken the time to know which businesses will accept debit cards without a hassle.
"Also most of the benefits from credit cards are travel related. Like rental car collision insurance, travel insurance, etc if you use the credit card."
I'm beginning to sound like a tin-foil-hatter here, I know, but things like travel insurance are fluff that the credit card companies throw out
to induce people to use them.
I use a debit card. Why is that a mistake? The only real reason I can think of is that I don't believe debit cards are covered under the consumer protection laws that credit cards are. Unless you mean because I'm missing out on the reward points that a credit card would offer me?
They're not necessary, but they sure are useful.
You get all sorts of perks, like fraud protection, extended warranties, etc, etc. You get cashback (or miles or points, or whatever). All you need to do to stay in the black is to pay your balance at the end of the month. Best thing ever if you ask me.
That isn't necessarily true. I have and frequently use a credit card, but I do not actually need the line of credit. I have it to establish a credit history so that someday when I actually do need credit (e.g., for a home loan), I'll be able to get it.
I think that "the reason" will vary from person to person. For me I prefer my credit card to debit because of consumer protections and chargeback ability; but I definitely know a lot of people that use their credit card as an actual line of credit.
I was specifying the reason that they came into existence in the first place (as opposed to debit cards), not why people use them now.
My opinion is that the reason credit cards remain so popular now is because of Visa's policy that forbids merchants from charging a different price for credit card transactions. As a consumer, when you pay by cash or debit then you are effectively subsidizing purchases by credit card. Credit cards wouldn't be so popular if the consumer was made to bear the true cost of their chosen transaction method.
I think many would prefer to use a debit card and be reimbursed the difference for the transaction fee (vs. credit card) but Visa's policies don't allow this and unfortunately it's not viable for most businesses to simply stop accepting credit cards.
> It's true that some people need to purchase items on credit but the reason that they're so popular now is less to do with having a line of credit and more to do with the legacy of the technology.
I don't know if that is true.
My wife and I make a fari bit of money but we use credit cards so we don't have to worry about cash flow. If I want a new mac I just go out and buy it.
I don't have to worry if I have enough money in my account at that exact moment or not because I know that at the end of the month when the credit card bill comes I"ll have enough to cover it.
We might be an exception because my wife divides our income into several buckets as it comes in and then pulls from those buckets to pay the credit card bill at the end of the month, so I know very well what my monthly budget is .
TL/DR we use credit cards as a line of credit to smooth over cash flow throughout the month as do most afluent people I know.
If you're doing it right then your credit card account should be earning you the approximate equivalent of 1% cash back via rewards points or another mechanism. For my personal card I use Chase Sapphire (the one without the yearly fee), which gives 2x points for all dining purchases. Always confuses me when I see people using cash or debit cards. At my current rate of spending I could get a free iPad and a few other goodies every year by doing nothing more than not bothering to carry cash. In fact, merchants have to increase their prices slightly to account for the transaction fees, so anyone using cash is actually (in a small way) paying for my rewards.
Yes, that's the whole problem. I'm tired of paying for other people's airline miles, cashback, etc. This is an inefficiency built into the payment system, and it harms small businesses and lower-income people the most. I try to avoid using my credit card out of principle, because I don't like charging merchants more.
I appreciate that Dwolla is trying to remove this inefficiency from the system. Mass conversion to a more efficient system would, eventually, mean cheaper prices for everyone.
It always confuses me when I don't see people take pennies out of the change tray at gas stations; it's free money, just sitting there. It confuses me when people pay to ride the bus when they're so unlikely to get caught not paying. It confuses me that people don't just file for bankruptcy and forget all their credit card debt.
If you're still confused, people have their own pride and principles. Something being legal or otherwise doable does not mean that everyone considers it moral.
To me, it feels wrong to leverage a slimy Visa policy to bilk airfare from merchants who have to accept credit to compete and from customers who don't opt-in to the game.
As it turns out, when I'm not stealing pennies from the penny trays at gas stations, I often shop at businesses that only accept cash and have no issue with it. If a business accepts credit cards, however, I'd rather have that small part of the fee come back to me than stay in Visa's pocket.
Also, debit cards pay straight out of your regular bank account. With Dwolla, funds come out of your Dwolla account and it takes 2-4 days or longer to move funds into that account. It's an interesting concept but with delays like that I don't see how it can compete with plastic. Too bad, card processing fees are outrageous!
You can, I just confirmed by bank account with Dwolla this morning.
One of the guys asking Dwolla questions on Twitter was a 4th generation jeweler, who regularly has $10k and up transactions. He was very eager to learn about the merchant APIs. He could probably save $500-$900 on a $30k ring if the transaction was made with their service. There are a million examples like that out there.
> Basically he's replacing checks, not credit cards.
Meanwhile, in large part of the developed world, banks do direct transfers nationwide and checks are dying rapidly. I'm 36 and Norwegian. Before I moved to the UK, the last time I'd seen a check in person was when I was 5-6 years old, and I'd never had a checking account as they're no longer offered as standard in Norway.
While checks are still more common in the UK, they are being phased out, and direct account to account transfers are now down to about 2-5 hours during the business day.
Dwolla faces a massive risk that the big banks will just wipe out their value proposition overnight by deciding to copy the European model.
I don't know how everyone else does it but in my case:
1). You remember to take cash and if you forget, you always have your cards on you and an atm is usually no more than a few minutes away. You can also increasingly pay for these sorts of things via mobile phone.
2). The school sends their bank account details along with the trip information and I setup a same day wire transer online.
Exactly. It just doesn't make sense for me to have a checking account with $10k or $20k in it earning 0% interest just in case, when I can have a credit card with a $20k limit in my pocket all the time that I can use if I ever need it.
At 40MM/month, with average transaction of $500, and a $0.25 fee for each transaction, they make $20,000 per month revenue... After you pay employees (12 people), other costs (including legal), and take a hit from fraud, I can't imagine there is a great upside to this business unless they start doing at least 100x more volume. Concidering the nature of the business, I don't see this happening.
Many PoS merchants also now charge surcharges for using cards. (which I admit for a merchant only makes financial sense if you underreport cash on your taxes--otherwise it seems the costs of handling cash coupled with lack of reporting is drastically more than the interchange).
Begs the question - why are wire transfers so expensive in the US? Most banks here charge $25 (and also make it difficult to execute online), yet you can send a check for free. Doesnt make sense.
The only sensible application I've seen is ING's person2person payment application that allows an ING customer to transfer money for free to anyone with an email address. The recipient just has to enter their bank's ABA number and account number.
> "why are wire transfers so expensive in the US?"
Regulatory capture. There's a ton of financial incentive for the banks and processing networks to push credit. Instead of a simple processing fee that gets pushed to near-zero, they can get a percentage transaction fee from their monopoly network, possibly participation fees from the merchants, lock-in/network effect, they get to push credit debt to increase revenue from the purchaser, they can run 'promotions' and 'rewards' programs to stimulate use, etc.
Even before the overdraft racket had a light shined on it, banks and networks were pressuring merchants (through 'incentives') to shift transactions back to credit. They were raising debit processing and card fees in direct response to the revenue effects of consumers switching to debit. Lowering potential debit revenue by cleaning up overdraft nonsense just put the final nail in establishment incentives to support debit.
There is. The banks mark up their costs. Wires were $7 at my bank 12 years ago, they're up to $25 now. Sounds like profit to me.
There are a ton of alternatives out there for transferring money. Wires are just one Fed product that happen to have a specific speed/security/limit/regulatory system.
Off the top of my head, if you want to move money, there's at least: ach, wire, image clearing, paper check clearing, image exchange, the atm network(s), the debit card network(s), the credit card network(s). That's leaving out paypal, western union, dwolla, and whoever else has started a money transfer business.
Almost every single one of those has different guarantees about timing, reversability, regulations, and transaction limits.
Wires happen to be a ca. 2 hour difficult to reverse (but possible) from /to banks connected to the FED. They're more expensive, probably on the order of $1 + staff overhead.
ACH is a roughly overnight to/from any bank connected to the fed, pretty easily reversible for 3-90 days. They're ~$.01/transaction at scale, and you can batch huge numbers of them into one file, so they scale. That's where most bill pay and direct deposits go, as well as a ton of other stuff.
> The recipient just has to enter their bank's ABA number and account number.
Sounds like ACH. I don't think it's possible for individuals to use on their own, though.
I can just log into my bank in Germany and transfer money to any account in Europe (even in the UK) with zero fees. As mentioned, it's a very common method of payment because it costs nothing to set up or use. Only downside is that transfers usually take a couple days to clear.
In Germany you could easily end up paying that much for a single cash withdraw from your own German bank account if you end up using the "wrong" ATM... completely ridiculous and nothing but frakking with customers over bank account turf.
I don't know about you, but I'm not generally keen on giving my account number to someone so they can wire me a few bucks. That's rather error prone and a little shaky on the security side. It can also be rather expensive, depending where you're sending to/from.
The IBAN account numbers we use in Europe have a 2 digit checksum against errors (mod-97 - see http://en.wikipedia.org/wiki/International_Bank_Account_Numb... ). Banks are also not allowed to charge more for inter-EU transfers than for national ones, so in most cases transfers are free (because they are free within the country).
The banks didn't do this willingly, they were forced to by the EU.
I think most of the applications (like the ING example) have the recipient supply that information to the sender's bank, not to the sender himself.
Not totally sure it works that way in Europe, but I think so.
In Europe it works like this: If you want to receive money, you give the sender your bank account number. The sender can then transfer money to you using his bank's website or mobile phone application. There is no risk involved, because knowing somebody's bank account number only enables you to send them money -- but not to withdraw money. Transactions are usually free, but take one to three work days to complete.
That doesn't address the error-prone nature. I don't know off the top of my head my account number or routing info. Looking it up is a pain and typing it in can be done incorrectly. This isn't something I want to do regularly.
I'm also not clear how the recipient supplies their info to the sender's bank. If I don't have an ING account, how can they verify that I'm me, and not someone else who's pretending to be me in order to intercept the transfer? As I recall, when I've done wire transfers, I've always been given the account info of the recipient for me to provide to my bank (but I haven't done this very frequently).
Edit: I just saw your other reply where you describe the ING app. I guess that works, but it's rather unfriendly. I'm always a little wary of high-security stuff (such as money transfers) that depend on email, too, but that's also an issue for Dwolla and probably a lot of the other payment startups.
> I don't know off the top of my head my account number or routing info. Looking it up is a pain and typing it in can be done incorrectly. This isn't something I want to do regularly.
But how is that any different from a credit card number? I have all my bank info in my pocket, right on my Maestro card. No expiration date, no CVV code. Just an account number and a publicly-known bank number. If I'm authorizing a direct debit, that's all I have to enter.
As davidhansen said, a typo on a credit card number is likely to be an invalid number. In addition to that, I almost never give anyone my credit card number directly. I swipe the card so there's basically no chance that I'll get the number wrong. And the security is addressed by the credit card company, who guarantees that fraudulent or incorrect charges will be credited or reversed. There's no such guarantee with a direct debit, and that makes it a much larger security risk. (This is one of the reasons that Visa charges 2%, of course. You're paying for insurance.)
My guess would be the size of the collision space. Bank account numbers tend to be shorter, and depending on date of opening and institution, may have been sequentially assigned. It would be much more difficult to accidentally enter someone else's credit card number than someone else's bank account number. In addition, if you accidentally sent $5k to 61-019341 instead of 61-018341, chances are the recipient would be less than willing to be a good citizen and admit it was an erroneous deposit.
UK bank account numbers is a 6 digit sort code + 8 digits account number. The account number is unique for the bank, and assigned however the bank wants. It might very well have been sequentially assigned for some institutions.
The 6 digit sort code is unique for the bank branch across all UK banks, generally the branch on record for the account (most UK banks use the sort-code for the branch the account was opened at). Unless you happen to mistakenly enter an account number and sort-code that matches, and you manage to mistakenly enter the name of the account holder for that bank account, they'll usually catch it.
The situation is similar across Europe, so if this is a problem in the US, it's a problem of the banks own making, and one easily solved the same way it was in the UK: By adding a sort-code, and matching on the name as well.
I have a hunch that the penalties for check fraud are disproportionately severe compared with crimes of a similar social impact. I wonder if the same would be true with ACH transfers. My point is that governments take bank crimes seriously as prosecute them aggressively.
I'm sure that the penalties for check fraud are quite high. Nonetheless, I don't want to be a victim of check fraud. It's a massive amount of hassle when you have to fight financial fraud, and sending the criminal to jail doesn't change that.
There's a lot of talk here on how credit cards trump every other form of payment, on credit lines and rewards. Americans love their cards:
* 1.4 billion credit cards held by U.S. consumers
* Average credit card debt per household with credit card debt: $15,799
* Total U.S. consumer debt: 800 billion (down from ~1 trillion in 2008)
Yeap, look at that debt, credit cards are amazing.
Let me put my f___ the system hat:
1. $2 trillion in transactions per year.
2. Merchants pay between 2-4% in fees for every transaction
Many people seem to forget about the second - "I'm not paying any fees" :/.
That means around $40 billion in fees per year. A few billion short of the national budget for the US Department of Education. I really, really doubt it's costing all this money to send and track (mostly virtual) money around. And we haven't taken into account the late fees (around $20b/year), overcharge fees, annual fees, banking fees and others.
Credit cards are just money harvesting machines.
Why exactly do we need a third-party to handle our payments? Banks own our data and most of the infrastructure. Electronic payments should be part of the basic account package. "Reward" cards are just another marketing gimmick to get you to use more cards.
Cutting myself short, I'm extremely excited with what Dwolla/Square and others are doing. It's 2011, I want to make payments with my eyes!
I'd never written a cheque until I moved to the US; I was pretty shocked at how backwards money transfer is here. In Australia, BPAY (http://en.wikipedia.org/wiki/BPAY) is pretty much how all utilities and services are paid for. Transactions between individuals are usually via standard wire transfer and are free, and often instant.
I'm using Chase QuickPay to pay my rent. No fees for either of us and it works great, I don't even have a Chase bank account, but quickly set up an account and linked it to my BofA account. Only problem is I believe the daily limit for payments is $2,000.
From this example, clearly some banks are figuring out how to sidestep the credit card companies and provide value. How would this and other similar products like the ING product not be serious threats to Dwolla?
I got the opportunity to listen to Ben speak at Startup Weekend Des Moines and I have to say I'm really impressed with him. Regardless of Dwolla's future (personally I think they will transform the industry), Ben is a shining example of working hard and being a successful entrepreneur in a place that really isn't very supportive of people who think differently. There are now a few legitimate VCs, college courses, and frequent startup events in the Des Moines area and every single person I've talked to gives a lot of credit to Ben for helping that grow. Des Moines even just recently launched one of their first incubator programs (Startup City) and is seen as a legit player in the Silicon Prairie. My team at Startup Weekend Des Moines (Fundle.co) revolved does group payment systems and Ben brought his team from Dwolla to meet us and offer their expertise for coding the backend payment processing part of it. Even if they don't kill the credit card, Dwolla deserves a lot of respect for helping to jump start the entrepreneur community there.
In Finland, account-to-account wire transfers are practically free and there are two internet buying options in general use that rely on them alone.
First, most internet shops can do what the mail order companies have done for decades: they send you the product along with a bill that you can pay with a wire transfer. These days it means you go to you internet banking site and issue the transfer directly from your account to the merchant's account.
Second, a majority of big merchants provide "internet banking payment" where the merchant's site is linked with the top ten major banks' internet services. From the merchant's site you choose your own bank and they will redirect you to the online banking services of that bank, along with the amount they want to charge and some other metadata. Now, your bank will ask you to login to your own internet banking account and use it to authorize a wire transfer for the given amount. After that's done (securely, on the bank's own website), the bank will redirect you back to the merchant's site, again with a token that the merchant's software can use to verify that the transaction went through.
Also debit cards are in high use: they are usually free to obtain as well and it costs a merchant much less to charge a debit card than a credit card. This is sort of related because debit card transactions are practically just wire transfers. Some of them, such as Visa Electron, will actually require an online connection to your bank so that the balance can be checked prior to the wire transfer.
It all comes down to the fact that Finland's banks have been historically well interconnected and they also have a long history of electronic inter-bank transactions. Wire transfers have been a commonly supported and cheap way to transfer money since the 80's: also private individuals can use them to move money to each other free of charge. Further, wire transfers are immediate between accounts in the same bank; between two different banks it takes one night to get them cleared.
Maybe the current downturn (bankruptcy filings, closing of CC accounts)is forcing people to start using cash instead of credit. I am a cash person myself, but asking people direct access to their bank accounts would be a hard sell, at least with credit cards there are many situations where they would allow chargebacks. They will have a niche market of cash based merchants, that is for certain. But it is way too early to say that their system can make credit cards obsolete within the next few years. Credit cards are just becoming popular in emerging markets where eCommerce is relatively nascent. The real issue now is securing cross border and long distance payments, being able to provide an unprecedented level of security demanded by the globalizing peer-to-peer and business-to-business transactions.
Where we've seen a ton of transactions right now is with people paying monthly rent.
I don't understand this. Perhaps it's an American thing, but here in EU, I just put my landlord's account numbers into my online banking and I can transfer them money for essentially free. I even set up a standing order so it'll pay the same amount at a fixed day per month. I don't have to worry about paying rent. How does a landlord accept money via their credit card?
If somehow I can check exactly who send me the money it would be great, however times are, banks don't always show you who is sending you money in the statements (at least happen to me with my non-EU non-US bank). If one uses such service, the statement would have clear indication of who makes the transaction and would be much more traceable.
For reasons unknown to me, the local property oligopoly accepts debit/credit rent payments only through an outsourced web service which charges $50 per payment. Perhaps they've convinced the property owners that they have a patent on paying rent online or something. Maybe there's some sort of risk involved. Maybe there's some sort of arrangement with credit card companies to discourage people from earning reward points on their rent every month.
My bank's website doesn't list the company as one that it knows how to pay bills for, and wants you to send them a copy of the physical bill to get it added (there are no "bills" for the rent, so nothing to send). A direct transfer might be possible, but they don't seem to be advertising their account number.
Every bank I've ever tried bill pay on (ING, Bank of America, E*Trade bank, Citizens Bank, Kennebunk Savings Bank) offers an option where you simply enter the account number and bill address, and they cut a check for it. No hassle. Maybe try some other bank, then?
It really surprises me how many nay-sayers have posted negative comments, here. Bottom line is that, because of the popularity of paying with credit cards, merchants have to pass on the cost of transaction fees to consumers. Consumers pay. Will your reward points make up for the increased prices that you unwittingly pay? I doubt it. Even if Dwolla isn't the one to do it, toppling credit card profits is in everyone else's interest.
The are diffrent because the can be avoided easly. Visa/Mastercard are not really doing much but the suck lots of cash out of the real economy and you think thats fine because other people/things suck out money too. We should the consomer keep paying for this when it can be avoided. If there are other silent cost you too should do a start up to help avoid those.
I don't see giving direct bank account access to any third party plus from my own customer point of view, both VISA and Mastercard have worked well for me in pretty much all situations in a lot of different countries all over the world.
If it can bring down the credit card transactions costs then great but other than that, I see no reason to move to bitcoins or dwolla because I see not a single benefit for me. Maybe it is great for you USA hackers but here in Europe... shrug.
As a customer, I prefer: http://venmo.com
Lets me easily pay my friends and vice versa, 100% free, no transaction charges.
Funds get pulled out of my credit card like a regular purchase (OR out of debit card or checking if preferred)
Funds paid to me get automatically deposited into my checking account.
Usage is effortless.
They make money by charging a percentage on transactions that businesses receive.
Anyone out there paying their rent with a credit card while maintaining no fees for the landlord?
I played around with Venmo in the past and thought this would be perfect for this use case. Been a while, but I believe you can accept credit cards directly and pay no fees. Seems crazy, but I think the only downside is the amount limits.
Would be awesome to collect cc rewards on rent payments every month.
Well, dwolla is a credit card company. I'm a CTO (and co-owner) of a medium-sized credit firm in Brazil (full stack: processing, credit, gateway, etc). We offer plastic cards, iOS & android apps, NFC, IVR calls, web app, e-CPF (Brazilian electronic "social security" card) as form of payment methods. Guess what? Most people WANT the damn card. We would LOVE not to spend 1.4 U$ on every card we have to manufacture. I don't see Dwolla as the future of payments, they offer a limited solution. My company is planning for a future where there will be many ways to make a payment, fit for every social class and/or preference. In brazil, it takes 3 minimum payments to buy a smartphone. In the US, 49 million citizens are poor. Let's not deny the economic reality we are living in right now.
The 28-year-old in the story is a sympathetic protagonist, and gives the venture plenty of indie cred, but let's all take a moment to reflect on the fact that he's only being allowed to do this because one of his primaries is an entrenched inside player. He managed to pitch someone one layer deeper inside the onion of oligarchy, and those folks decided the glass slipper fit.
Longer answer, they're usually overnight, the transaction goes out one day and funds are available the next (to the bank anyway). In some cases, there's same day stuff if you hit the early window, but that takes a cooperative bank. Retail wise, they can take up to 2 business days if you try to do it at a small bank with a correspondent relationship to a real bank in alaska.
But when you see 4 or 5 days, it's because the bank is holding access to the funds because the transaction is reversible. 3 days is the window for things like NSF and incorrect account numbers, but in the case of unauthorized stuff, it's 90 days. Frauds can claw back even farther.
This is interesting. I really like Dwolla as a company and the ambition, and think the are executing well, but there are some things you should know.
1) Most Americans use credit cards because they need the credit. That is something that won't be solved. Many of us also like the benefit of rewards (miles, dollars, whatever). To get payers on board, you need credit, rewards, and exclusivity (i.e. is this the only payment method available at somewhere where I want to shop). The last 2 meaningful companies were paypal and discover card. PayPal had millions of Ebay sellers using PayPal AND they initially paid people to become members. Discover card started the cashback movement and was the only electronic payment option at Sears (largest retailer in the world at the time).
2) Due to the Durbin amendment (which went into effect October 1st of this year), debit card cost to a FeeFighters merchant for the average transaction in the US is about $0.25. (http://feefighters.com/durbin). They now cost 22 cents plus 0.05% of the transaction. The reason that I mentioned a FeeFighters merchant is that most processors do NOT pass through the savings to the customer, you only get that with interchange-plus billing (which only about 10% of merchants are on, mostly big merchants).
3) Doing some quick math, that $350 million in transaction volume gets them to $175,000 in revenue per year
($350M/$500 transaction size)*$0.25 = $175,000.
Still, they have a fantastic opportunity and I for one am rooting for them. Ben has the same roots as FeeFighters (had another company, was pissed off at how much he was paying in processing fees). He chose to tackle it a different way, one that is probably harder to execute on but can make more change in the long-run. Having met him, I bet that he didn't quite say the words in that headline.
Credit cards right now are used by a lot of people because they're the best payment option. Easy to use, limited risk of loss to theft, many offer cash back or airline miles.
They can also be used as a source of payday/personal loans, but that strikes me as suboptimal. Justifying the existence of credit cards as a source of credit doesn't make sense. One, why must the credit be tied to a card? Two, how often is a responsible spender gonna need that card as a lender of last resort? In fact, the idea of a "charge card" predates the idea of attaching a revolving line of credit to one, and you can still get charge cards from American Express, among other firms.
The only argument in favor of credit cards is the freedom-oriented one that people should be free to have easy access to run up revolving debts. I'm fine with this argument, but let's not obscure the issue by pretending that a significant number of people actually need access to that credit and that they need it in card form. The utility of credit cards lies in making payments, not having credit, and they're clearly an inferior solution--the space is ripe for disruption.
"Check cards", or whatever name is used for bank cards that you can use as a credit card (instead of only with a PIN) are unequivocally a worse deal for consumers. You don't get any of the benefits (cash back/miles, insurance, etc) and in the case of fraud, the money is gone until the claim is processed. The physical form (card) is irrelevant, but it will be very hard for any system to compete with rewards credit cards. Since the card companies do not allow the merchants to pass on the fees to the consumer, unless you can make a system so pervasive that merchants can afford to _not_ accept credit cards, I don't see how you can compete on the basis of low fees. You have to give at least 1% back to the consumer (more to get people to switch), and then you have only removed a tiny bit from the status quo. The people who subsidize the rewards cards, those who carry a balance, probably aren't interested in a system that doesn't offer credit.
I agree with this 100%--debit cards and check cards are a bad deal for consumers, compared to credit cards, and I only use mine at an ATM I trust.
I want to make this comment just so people reading these posts aren't confused--charge cards, which I talk about in the above post, aren't the same as debit cards; charge cards are much closer to a credit card that you have to pay every month. These are a great option for people who want to avoid revolving credit and can afford the annual fee most of them charge (but they come with perks). Anyway the charge card demonstrates it's possible to do easy electronic payments, in a way safe for consumers, without tying them to credit.
Yes, in the sense that they can't charge customers paying with a credit card a different price. However, because payment fees are an expense to their business, merchants absolutely pass on that cost to customers - it is reflected in the final price of whatever they are selling. In a sense, the non-credit paying customers subsidize those paying with a credit card.
Of course they/we do. But, the Nash equilibrium is at 100% credit card use: if I stop using credit cards at vendors, I lose out on the benefits (interest-free loan, chargeback ability, rewards, purchase tracking through Mint), in return for a savings of 1 - N/(N-1) * transaction fee = zero. I have an incentive to keep using charge cards.
The parent comment was actually talking about charge cards, not check cards. Those predate debit cards and credit cards. With those, you agree to pay your bill in full every month, so they are not tied to a line of revolving credit like a credit card, nor do they directly debit from a bank account like a debit card.
They are rare these days as they usually charge a significant annual fee. This is probably since there are no over-limit fees nor usurious interest rates (unlike a credit card).
Check cards issued by banks today, with the Visa and MasterCard logos, are fully equivalent to credit cards minus the line of credit. When used as credit (anywhere Visa/MC is accepted) they offer reward programs, fraudulent payments are refunded the same day, etc.
In 2002, my MasterCard check card was stolen and my bank account was cleaned out by the time I got down from my climb and discovered the theft. It took three weeks (including closing my original bank account and reopening with a different account number) before the money had been refunded. This was inconvenient considering that I had just started a year of exchange in Canada. Unless the rewards/benefits/insurance is _better_ than a credit card, it still doesn't seem like a wise choice.
Here is who gets paid by debit from my bank accounts: my employees, my lawyer, ATM cash withdrawals, and my credit cards.
No damn way I'm giving random vendors permission to ding my bank account. Credit cards are about cash flow safety & billing safety. Debits from a bank account are no substitution for this. Would you use a debit card at a strip club?
I used to think the only argument in favors of credit cards is that they offer credit.
However, from a purely selfish perspective, they also reward people who pay on time - if you play the "rewards" game, which I have avoided throughout most of my adult life. I regret that now. The rewards are pretty substantial and based on my math they almost make up for the transaction fees (I would say you can get 2% cash back - which offsets most of the 3% the card company takes).
The question is will merchants offer discounts for dwolla? I doubt it. Instead Dwolla will have to offer cash back or other rewards to customers. Given their financials as described in this article, I don't see why they couldn't succeed. Clearly their model works better for merchants. Does it work better for consumers? Only if they offer rewards, which would cut into their attractiveness for merchants. Still with a flat $0.25 they could gain serious traction with large item merchants.
I am hoping the likely outcome of this is a further weakening of the conventional financial industry.
It will be fun to watch. I wish them the best of luck.
I think it will be a slow process but they will certainly succeed as a business. The rent payment use case alone should be enough to keep the company afloat indefinitely. Rental companies can very easily say we only accept cheques every month or if you want automatic payments then dwolla, no credit cards.
The real reason I wouldn't use dwolla for a consumer web transaction over my credit card is not the credit aspect but the risk aspect. With a credit card I'm protected against fraud fairly well whereas with debit or dwolla the protection isn't nearly as good.
They don't really offset the fees because the fees are higher! At least in Canada, the high points cards actually cost more for merchants to accept. Merchants are charged different fees per card but by the rules of the credit card companies are not allowed to refuse the high cost, high point cards.
Yes, really the optimal plan is to use an Amex that has higher rewards due to its higher merchant fees. Yes, the fees get passed on to the customers, but they get passed on to ALL the customers, so the people using Visa or MasterCard or cash are subsidizing my Amex fees. Not particularly nice, but optimal!
Not just rewards, having a credit card with a good history is so valuable. I've just turned 20 and my credit rating is the highest possible because of how I've used credit cards (and other sorts of credit) in the past, they are a fantastic way to prove you're a good person to give credit to.
You wanna know what debit cards don't do that credit cards do? Help me build a credit history and a good credit score in preparation for buying a car and/or house. In absence of credit cards (ergo credit history), the only way to buy a new car or house (for the first time) is Cash or Co-signer.
If you already have a credit history because you already bought a car or a house, good for you, but how did you get there?
Isn't the US weird? Over here you just need to prove you will be able to afford the loan (paychecks or whatever). It's against the law to discriminate based on past financial history (though car dealers do it all the time).
Approximately 74.9 percent of the U.S. families surveyed in 2004 had credit cards, and 58 percent of those families carried a balance. In 2001, 76.2 percent of families had credit cards, and 55 percent of those families carried a balance.
So, assuming the balance hasn't shifted too drastically, it's true that the majority of Americans need (or at least find convenient) the credit. But there's also clearly plenty of people who don't; 15 to 20 percent of Americans is a pretty big market.
Its weird how they did the math here, they said 30-60M/Month or 350M/yr, that math is busted, is 360M on the low end and 600M on the high end.
Which puts them at $360M/$500 transaction size)$0.25 = $180,000 or on the high end,
$600M/$500 transaction size)$0.25 = $300,000
My parents put $2000 in a Dwolla account, did nothing with it, and two months later decided to withdraw it. Dwolla put a hold on it for over a week without any notification, and my father finally decided to call. On the phone they said 'well you know, $2000 is a lot of money'. My parents had to send over scanned photo identification just to get their money out.
Anyways, what I learned is that Dwolla's customer service is terrible. I don't recommend it to anybody.
So because Dwolla's customer service tried to protect your parents, they're horrible? Just curious. I used to think my bank was evil because they'd process every check manually adding delays -- but it's saved me in a few fraud cases.
(They're still evil for many other reasons though)
> So because Dwolla's customer service tried to protect your parents, they're horrible?
This is a common marketing lie. This actually isn't trying to protect his parents. This is greatly inconveniencing his parents in order to protect themselves in a cheaper fashion.
Preventing theft is hard. Preventing theft while not punishing users is extremely hard. And so lots of banks and services take the easy route: forcing complicated passwords, OTP's, holds, "sitekeys", security questions, et cetera.
True protection would be: "Behind the scenes we are going to do everything we can stop thieves. And, in the very rare cases where they succeed and access your account, we'll cover it 100%. And, we're not going to make you stab yourself in the eye every time you want to create an account, or send, receive or withdraw funds."
Then it's up to Dwolla to build in strong defensive and offensive measures to combat online thieves, without making 99.9% of its users suffer for the 00.1% of people that are looking to steal.
tldr; these "security measures" absolutely suck and I can't wait for the service that comes along and says "we did the hard security work so you don't have to".
P.S. Dwolla looks awesome. I signed up. Am very impressed. I realize EVERYONE has these PitA security measures and I'm sure the Dwolla guys hate them just as much as me and have plans to eliminate them eventually. I just had to respond to the marketing bs.
"Preventing theft while not punishing users is extremely hard. And so lots of banks and services take the easy route: forcing complicated passwords, OTP's, holds, "sitekeys", security questions, et cetera."
You will always be inconvenienced by security measures. All of the things you described is the company working "behind the scenes".
"tldr; these "security measures" absolutely suck and I can't wait for the service that comes along and says "we did the hard security work so you don't have to"."
The problem is that if you got your money stolen, like you wrote above, you expect the company to pay for it 100%. If security was reduced to the levels you are describing, more money would get stolen and the company would be liable. Why would any company want to take this risk?
For any company or bank dealing with money, image is everything. Customers will leave if they can't trust someone with their money. I know I would.
"This is a common marketing lie. This actually isn't trying to protect his parents. This is greatly inconveniencing his parents in order to protect themselves in a cheaper fashion."
I would gladly start a company with less security if you sign a statement saying that my company isn't liable for any money stolen because of the inconvenience of higher security.
Well, looks like they learned from the pros... paypal asked me for my name, address, credit card and bank account verification and on top of that a scanned passport AND a utilities bill - I find this absolutely outrageous.
While it sounds great that someone is taking a stab at making transferring money easier and cheaper, they are clearly missing a few crucial points.
First, they are complaining credit card companies charge them for their service - on the other hand, those companies do have costs for building and maintaining their systems and all costs that come with it. We will leave the question whether their prices are reasonable or fair aside for now.
Another benefit I get from CC transactions: when I send money to the wrong person or got scammed, I can just have VISA cancel it and I get my money back. In the good 10 years I have been using my own CC(s) I needed to do that maybe 2 or 3 times and it worked absolutely flawlessly. You cannot just cancel a bank transaction and get your money back like that.
Also, wiring money abroad is going to be a much bigger problem for them.
But there is a far more fundamental flaw in their logic:
> "We think, in the long term, sending money should be as easy and effortless as finding a friend on Facebook."
The reason anything money-related is so over-regulated and cumbersome and full of regulations and bureaucracy is not just "the man keepin' ya down, bro" and neither is it only stupid people who only try to come up with empty regulations to bill you.
All that is in place to fight against money laundry and help make it more difficult for worldwide organized crime to make easy use of their illegal cash. The very reason you can not just send money as easily and effortlessly as friending someone on facebook is: if you could, your first customers would be organized crime. They cannot wait for new possibilities to launder money easier and faster.
I am wondering how they can be moving 50 million a week without all sorts of agencies cracking down on them? This has got to be heaven for small and big time drug (or weapons, humans) sellers as of now.
So ultimately, it makes me sad this doesn't look like a promising replacement for the paypal overlords.