Ben Milne has a special relationship with transaction fees.
An entrepreneur with a design and manufacturing business in Iowa, Ben found himself obsessed with one simple notion: transaction fees were eating into his profit margins. If you consider money as data, there had to be a better way with so much money sloshing around in the system when the marginal cost of actually transferring the money is practically zero. So why did it cost him $55,000 a year to access it? Why then did he have to wait seven days to get paid?
This is the frustration out of which Dwolla was born. Ben set out to redesign a much better, and radically cheaper, payment network.
But how in the world would he scale a new, two-sided payment network today?
The PayPal and Visa stories are well documented. Visa’s story is famous. A genius by the name of Dee Hock pioneered a brilliant strategy that empowered a loose association of affiliates to distribute the card all over the world, almost entirely manually. And while eBay was distracted building and scaling their marketplace, PayPal snuck in to become the defacto standard for eBay transactions between individuals. eBay bought a competitor and tried to unseat PayPal but the network effects were just too strong and they ended up having to buy PayPal for $1.5B.
So how would Ben do it then? This is the beauty of his approach at Dwolla. Ben began designing a system based on the impending ubiquity of the Internet; something consumers, banks, businesses, and developers had immediate access to on their phones and computers. This would give Dwolla the ability to bypass the traditional systems, hardware, and distribution costs associated with the card networks birthed in the 60s and 70s.
Dwolla moves money for only 25 cents and can do so instantly (versus two to seven days it takes other processors). Signing up is free and there are no other costs. Not counting the hardware, gateways, and hidden fees, businesses and consumers were paying three to eight percent per swipe, adding up to over $48B in 2009. Ever walk into a bar, buy a drink and been told, “there’s a $10 minimum to use a card?” Yeah, that’s why.
What’s astounding? In addition to payments only costing 25 cents, transactions under $10 are free — this opens up a huge opportunity for Dwolla to be the defacto standard for micropayments. This “flat fee or free” pricing model strategy is such a compelling value proposition that large players, like the state of Iowa, are signing up for Dwolla in droves.
What about checks? Small business owners and consumers know the pain points associated with manually processing checks all too well and all the problems with the slow, antiquated Automatic Clearing House (ACH) network. How much does it cost to do a wire? $50? $10? That depends on where you bank. But either way, ouch.
These slow-moving, expensive, fraud proliferating systems aren’t just the United States’ burden. In many countries around the world, the luxury of ATMs, having cash on hand, or retaining the value of money as it moves from one person to the next, just isn’t possible. In many developing areas, networks charge up to 30 percent of a transaction because of the way you paid for a particular good or service.
The world needs a better way to transfer value, the same way it needed a better way to transfer information before the Internet went mainstream.
Now here are the other wonderful parts: Dwolla has created straightforward APIs, simple user experiences, social integration, and one of the United States’ most sophisticated and advanced banking software, called FiSync. And whenever Dwolla signs up a new customer, those users now send out their payments via Dwolla. The payee is then highly motivated to activate and bank-enable their Dwolla account to claim their cash. It’s natural convenience.
I am pleased to announce Andreessen Horowitz has led a $16.5 million investment in Dwolla to help Ben and his team realize their vision of fixing the worldwide payment network. Here’s why we believe this is such an amazing opportunity:
- Founder/market fit: Ben is one of the most determined and scrappy entrepreneurs we’ve met and has a deep knowledge of the entire payment network.
- Ridiculous market size: Dwolla’s FiSync is taking on ACH and FedWire, a combined $730+ trillion market with real-time transactions, new revenue streams and incentives for key players in the payment process.
- A snowball of traction: Its annual processing run rate has moved from the hundreds of millions to billions and its business development pipeline is chock full of opportunities.
- The simple strategy of “natural convenience.” Especially as it pertains to ACH and payout needs, Dwolla offers an easy-to-use platform for payers and a free, low-cost platform for payees.
- Radical innovations in anti-fraud and risk management technologies: For example, Dwolla removes much of the sensitive financial information, which is often exposed when someone uses a paper check or plastic card, from its transactions. This reduces liability for merchants and developers, and mitigates the threat of identity fraud for its consumers. Genius.
- One of a kind technology: Underneath Dwolla’s beautiful front facing experience belies a complicated, intricate series of systems, technologies, and considerations that we’ve never seen before.
- Our customer references came back over-the-top positive on responsiveness, customer/ developer friendly, and intuitive/ easy to navigate user interface.
Ben and his team are introducing an entirely new way to think, access, and use money. I am excited to be joining Dwolla’s board of directors and look forward to helping Ben build the next multi-billion dollar payment company!