$5 Million in Their Pockets, Dwolla Hikes Up Its Trousers

Willy Staley

By Willy Staley
Posted on Sun Feb 12, 2012, Last Updated on Wed Jul 16, 2014

Willy Staley is a staff writer and columnist for MyBankTracker.com. His columns cover banking, policy, and culture. More Columns »

Armed with $5 million in second round of funding, payments processor Dwolla must now plot out its course. Fortunately for them, they’re backed by Union Square Ventures, the New York-based venture capital firm known for its high profile portfolio, which includes Twitter and Foursquare. By joining the USV squad, Dwolla continues to toe the line between funky start-up and seriously transformative financial services company. As the newest feather in USV’s hat, does Dwolla need to pick a side? Or can they continue to be both?

Dwolla, which we have covered in the past, wants to make your money move freely. Founded by Ben Milne, and based in Des Moines, Iowa, the company has developed an entirely new payments platform that completely side-steps the expensive and primitive world of credit and debit card payments. Plus Dwolla only charges a quarter per transaction (unless it’s under $10, in which case it’s free).

So Dwolla is cool. Dwolla is young. It’s also a little …. confusing. It’s a web-based app, it’s a mobile app, it can be used sort of like a credit card, and it even has a bank-facing software called FiSync, which allows for instant access to money stored in bank accounts — a 21st century upgrade to cumbersome Automated Clearing House system we currently depend on for these transactions.

Dwolla is a lot of things to a lot of people. It’s almost certainly many things to the many investors and stakeholders who are betting on it.

A System, Not a Product

But all of these products work together to accomplish the same goal: the quick, secure and dirt-cheap movement of money. FiSync allows users to load their Dwolla accounts instantly from their banks. The rest of Dwolla’s products allow users  to exchange money, unfettered by interchange, PayPal fees, or physical cash itself. But with so many different facets of their business, designed to appeal to all payments stakeholders (consumers, merchants and banks), Dwolla’s mission might not be immediately apparent to those not already familiar with the vagaries and problems inherent to our current payments processing systems.

Milne wants to focus on engineering, and developing his API — application programming interface, the code that allows different software to interact with one another — to encourage further merchant adoption of Dwolla.

“We’ve really shifted focus from, OK, let’s build these five features and see what sticks, to we have these five people in the queue that need these things and these people have contracts so let’s build this one,'” said Milne, in a phone interview. Specifically, Dwolla will be adding one-click purchasing, scheduled billing and recurring billing functionalities to its API.

Dwolla is building for customers instead of building to try and get attention, Milne said.

Matt Harris, co-founder of Village Ventures, one of the VC firms involved in the Series B funding echoed this: “The next step is: How do they…build an API that every developer everywhere wants to integrate into commerce?”

Merchant-requested API fixes are Dwolla’s first area of focus moving forward, having solved their biggest consumer-facing problem — quick access to cash — by introducing “Instant” last Fall. That leaves banks as the lone stakeholder Dwolla needs to work with in its efforts to change how money moves. For that, it has the above-mentioned FiSync.

FiSync’s Transformative Potential

FiSync is apparently quite attractive to banks, for whom it would be something like an ACH alternative, but quicker and more secure than the prevailing system.

“The world’s biggest banks are watching very closely,” Milne said about FiSync, adding, “They’re people we talk to quite often.”

But expanding FiSync isn’t “mission critical” according to Harris. It certainly makes it easier for both merchants and consumers to move money in and out of Dwolla, but wider bank adoption isn’t absolutely necessary to expanding the consumer and merchant user base. The biggest concern with FiSync, according to Milne, is making sure it works right.

“If it works it’s going to be this really miraculous thing,” Milne said. If it doesn’t? “I’m never going to be able to work in the financial services industry again.”

Milne and Harris are confident that it works well, and Harris’ (and Village Venture’s) involvement in Dwolla is there, in part, to lend his expertise in this area. Harris has been on Dwolla’s advisory board since 2010, and has advised Milne on the rules and regulations of the payments world.

“In payments if you want to be innovative you have to walk a fine line between being transgressive and breaking rules,” said Harris, “and then on the other hand making sure there’s certain rules you don’t break.”

FiSync is an example of how Dwolla’s pitch to consumers is difficult. No one thinks about how their money moves around, and merchants pay interchange fees anyway, so …. why would people be compelled by a product that makes the arcane world of payments processing slightly less arcane? Would FiSync not be better off as its own company?

“We thought about that,” said Milne. “At the end of the day, we don’t want to be two separate companies right now. Who knows what the future will bring, but we don’t want to be two separate companies right now, and FiSync is a pretty integral part of implementing Dwolla’s vision.”

Harris elaborated that Milne doesn’t “view a merchant as just a merchant. He wants that merchant to do their payroll on Dwolla; he wants them to order their coffee beans using Dwolla.”

USV Offers Breathing Room

For these sorts of considerations, Milne and the rest of the Dwolla staff will have plenty of breathing room. Union Square Ventures and Village Ventures (which Harris said strives to emulate USV) both buck the dated stereotypes about New York venture capital firms — that they’re quicker to demand monetization from their portfolio than their California counterparts — according to Harris.

“I mean let’s look at Twitter. [USV] let them run the business for five or six years without worrying about revenue,” said Harris. “But if they (USV) had, too early in their life, worried about monetizing their user base when they had a million users it would’ve been hard for them to get to a billion users.”

Milne points out, though, that Dwolla is already monetized. No matter how little they charge, they still do take in a quarter per transaction above $10. “We know that the pricing model scales really well with the business,” he said.

They plan to leverage their relationship with USV to improve their API, scale the brand and build the network, he said.

With this new round of funding, Dwolla finds itself an adolescent company — rebellious, and confident in its convictions, but also scatterbrained. And this isn’t their fault. They’re making a transformative system, not just a product. A Square card reader need only interact with your phone, Visa and MasterCard — not an easy task by any means — while Dwolla needs to circumvent that system at every point — your bank, your phone, your coffee shop, everywhere. And on top of that they need to get people to use the system.

This round of funding seems to have the company narrowing its focus.

 

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