Are web dollars a credit card killer?

Ben Milne, founder of Dwolla, tells James Silver of his cyberspace vision of a payments world free of credit card fees


Interstate 29 cuts through the centre of the United States from the eastern side of the Dakotas along the state lines of Nebraska and Iowa to Kansas, Missouri. This multi-state region, spliced by the I29, is heartland America, where farming, manufacturing and financial services have traditionally predominated.

But it’s also home to a growing cluster of technology companies, collectively known as Silicon Prairie, one of the best known of which is Dwolla – a peer-to-peer payments platform based in Des Moines, Iowa.

Dwolla, an inventive mash-up of the words “dollar” and “web”, cannot be accused of lacking ambition. In its bid to rewire the hitherto somewhat stolid, suit-and-tie world of payments, the start-up says it has nothing less than the credit card giants in its sites.

“We want to be our generation’s version of Visa,” grins Ben Milne, Dwolla’s amiable 29-year-old founder, soon after his heavily-bearded features pop up on Skype. “We want to empower anyone with an internet connection to be able to access their money, exchange it with someone else and receive it – at an exceptionally low cost.

We just know that money is data and we want to be able to exchange it without making it less valuable

“Our generation is built on the internet. We believe in freedom and we don’t understand geography in the same way [as previous generations]. We just know that money is data and we want to be able to exchange it without making it less valuable. Our technology just facilitates that.”

Currently only available in the US, Dwolla allows its customers to use their iOS [mobile operating system] and Android-enabled devices, as well as social networks and physical locations, to send and receive money.

The company, founded in 2009, describes itself as “a cash-based payments network”, on top of which it has built technology for moving cash around fast. “Whether that means buying a latte with your phone at your favourite coffee shop, paying for a new pair of shoes online or sending money to a Facebook friend, Dwolla represents a whole new payment experience that we believe is the future of cash,” shrills the company’s website.

While the “future of cash” seems a tall order (the US Federal Reserve may have something to say about that), Dwolla is already making in-roads in this notoriously risk-averse industry. In its latest released figures, from April 2012, the company announced that 100,000 users and 15,000 merchants were generating daily transactions worth between $1 million and $4 million. Although it won’t reveal the latest numbers, Dwolla is believed to have grown steadily since then.

Initial investors included the actor and serial start-up backer Ashton Kutcher (which didn’t harm their profile), followed by $1 million in Series A funding from two Iowan financial services companies. In February 2012, Union Square Ventures led a $5-million Series B funding round.

The spark of inspiration for the start-up, explains Mr Milne, was less a wide-eyed eureka moment than a slow-burning sense of frustration that so much revenue from his previous business – selling speakers online – was devoured by credit card fees.

“I just got obsessed with it, man,” he says. “I couldn’t look at how much money was coming in without thinking about how much was going back out. It became less about celebrating a good day in sales and more about boiling with anger about how much I’d lost that day to the credit card companies. I was losing about $55,000 a year at the time – that would have paid for a great employee, a new product line or a car.”

From there Mr Milne started researching online about how to avoid paying interchange (card) fees. The more information he consumed, the more convinced he became that “there was a huge opportunity for technology to solve a problem”, he says. “It’s amazing that technology serves people taking pictures and sending text messages, but the technology stack when it comes to moving money hasn’t really got any better in 30 or 40 years. So the opportunity is just massive, which makes it a really exciting sector to be in.”

Exciting or not, Des Moines – often dubbed Middle America’s capital – is a long way from America’s hyperactive coastal technology hubs of Silicon Valley (in the San Francisco Bay Area) and Manhattan’s Silicon Alley. Indeed, many would argue that a fin-tech (financial technology) start-up based in back-of-beyond farming country is hardly well-placed to take on the plastic giants of Visa et al.

Mr Milne takes the jibe in good sport. “I don’t live in a cornfield, I live in a loft, in a city,” he says. “The advantages we have of being outside the coasts are: one, I can get to the east or west coast really easily; two, building a team was great, because we were able to benefit from the geographic knowledge-base people here have, which is finance and payments. First Data [Solutions], Jack Henry [Banking], Principal Insurance, EMC [Insurance] and Wells Fargo – those are the employers in these communities and people here know payments. We were lucky enough to figure that out and I think had we not been here, we might never have understood that.”

Warming to his theme, he adds: “Also when you are in a community [like Silicon Valley] where you’re competing with everyone else all the time for the next headline in techcrunch, that creates a certain type of culture. Here, we’ve been able to have 30 super-smart people, heads down, building something without anyone on the planet having any idea what it is.”

While the company was in its seed investment stage, Mr Milne had cannily turned to investors steeped in both Iowa and financial services, attracting a total of $1 million from The Veridian Group and The Members Group (a subsidiary of the Iowa Credit Union League) in November 2010. That, he says, enabled Dwolla to navigate labyrinthine – and prohibitively expensive – US non-banking regulations, which differ in every state.

“I would have needed $8 million to $10 million before I could have legally opened an account,” he says. “That deal meant that we didn’t have to raise all that capital. It also brought us our first customers, a bank to operate as our back-end and the structure we needed to operate legally – a huge thing in payments.”

Dwolla’s founder knows he has a titanic battle on his hands if the credit card and banking systems – so entrenched in our daily lives – are to be disrupted by fresh-thinking and technology. Yet the internet renders the sector’s infrastructure entirely redundant, he claims. “You don’t actually need a card or a card-reader. You don’t need to swipe. You don’t need any of that architecture any more. Our phones all have GPS [global positioning system]; we are connected constantly to the internet. And as offline and online commerce converge, the ability of an API [application programming interface] to pass an authorisation back and forth is really all that matters.”

Unshaven and scruffy, Mr Milne, whose first business was a lawn-mowing firm, looks like any of 10,000 tech entrepreneurs from Boston to Berlin. That’s fine for e-commerce or the frenzied world of apps. But perhaps less so in the sober environment of financial services. People are naturally cautious when it comes to their finances. The mattress stuffing can look appealing beside a fast-talking start-up guy, promising to unseat Visa. Won’t some (perhaps slightly older) customers think twice before trusting him?

“I don’t look like a banker,” he quickly concedes, laughing. “I run the risk of not being trusted. If you look me up on YouTube, you’ll see I swear a lot. Those are things that I know. But I do think recognising the problem and sticking to my motivations, allows people to accept you for what you are. Look, I’m not trying to take money out of the economy, by selling you something instead of something else you could pull out of your wallet. I want to put a lot of money back to work in the economy. And if I can do that, and make a good living for myself, then I’m a pretty happy guy.”

Despite consistent interest in Dwolla from Europe and Canada, Mr Milne says that while he is “working on” expanding overseas, his focus remains on getting the core US business right first. “This is not a build it and flip it company,” he asserts. “I’m in it not for the next few years, but possibly for the next decade. We need to make sure we’re building the right technologies for the future. And that’s a marathon, not a sprint.”

Dwolla by numbers

Founded: 2009

Employees: 28

Transaction fee: $0.25 for any amount over $10; free for $10 or less

Daily transactions range: $1-$4m

Number of participating merchants: 15,000

Number of users: 100,000

Total investment to date: $6.31m

How Dwolla works

1. Sign up.

2. Fund account via another Dwolla user or your financial institution.

3. Send money to merchants and people through mobile apps, email, SMS, Facebook friends, Twitter followers, LinkedIn connections, by location or Dwolla ID.

4. User receives money instantly and is able to transfer to another merchant, person or their bank account.