Did you know that an estimated $50 billion is missing from the United States economy, every year? That both retailers and consumers pay that much — $50 billion! — every year just to move money around electronically? It’s an annual, invisible tax on the economy the size of Bill Gates’ net worth, and you may know it by its boring-to-the-point-it-can’t-possibly-be-important name: interchange.

A big announcement from a small mobile payments start-up in Des Moines, Dwolla, claims to be a solution to this problem. We sat down with Ben Milne, CEO and founder of Dwolla, last Thursday in Manhattan, at one of those awful two-story cafeterias that Manhattan has so many of. (This was my fault).

Dwolla, which we have covered before, is a payments system offering users the ability to exchange money for just $0.25 per transaction, no matter the size. Users can pay via the web, or on their mobile phones, even using GPS to facilitate payments to brick-and-mortar vendors. Just a couple weeks back, they announced all transactions under $10 were free using Dwolla.

Dwolla is an interesting mobile payments platform in that it has a vision larger than making your credit cards virtual. Google Wallet simply takes your wallet and makes it virtual, even with little manipulatable virtual cards; similarly, Square links to your credit card; Dwolla recognizes the value of avoiding them entirely.

On first impression, Milne does not look like your average financier, and indeed he is not. Milne has the look of someone you might see cranking away at his laptop in your local coffee shop — appropriately, he was sipping a soy latte when we chatted — and you can maybe imagine that he used to sell custom speakers on the Internet.

Well that would be a fantastic guess, dear reader, because that’s exactly what Milne did before he founded Dwolla: he sold custom speakers over the Internet. He was quite successful too, and his success revealed to him the injustices of interchange fees and card-not-present fees, both of which tallied up to a staggering $55,000 tax a year on his speaker business.

“Dwolla wants money to be as valuable as humanly possible,” Milne told me. And counterintuitively, electronic payments have made your money less valuable, even as it has unfettered cash from its corporeal self. The problem is what Milne calls an old “legacy system” that has far too much overhead and casts off far too much “data exhaust” creating the need for expensive anti-fraud systems, not to mention all the other extraneous marketing costs: MasterCard’s “Priceless” ad campaign has a price. Jerry Seinfeld doesn’t shill for AmEx for free.

With this in mind, Dwolla launched their “Instant” system today. It gives Dwolla users instant access to their cash, from their bank accounts or borrowed from Dwolla, with no interest rates, and transparent fees. Instead of waiting the 2-3 days that cumbersome ACH transfers require to get money into your Dwolla account, Instant uses Dwolla’s FiSync network, which integrates with financial institutions in a secure fashion that makes these transfers faster and safer. See their infographic below to understand it:

You have the option to borrow up to $500 from Dwolla, and repay within 30 days with no interest. If you’re late, Dwolla will charge you $5 dollars. They stressed to me that Dwolla will do everything in their power to remind you that this fee is approaching — it is not their goal to levy it on their user, rather it is there to serve as a disincentive to being indebted to them (or rather, The Members Group, who are the lender of record if you choose “Repay Later”). Compared to BillFloat or Wonga, two other instant mobile lenders, this is a much better deal.

Also compare it to Google Wallet’s Google Prepaid Card, which only allows you to add funds from another credit card or debit card. Dwolla Instant roots out the interchange fees by side-stepping plastic entirely, but still offering the instant access to cash that makes plastic so convenient.The ability to access Instant costs $3 a month, and you opt into this cost (again, with repeated notifications from Dwolla). Only use it twice a year, in two different months? It’ll only cost you $6.

Is Dwolla Instant the best deal for consumers? Yes and no. The amount you would pay for it is not dissimilar to bank fees, but the way the fees are structured is much more fair — which was ultimately the heart of the complaint against the banking industry . Were you to opt-in year-long, you’d be paying $36 a year, the same as the apparently unacceptably high debit card fees that Chase and Wells Fargo tested out this year to recoup what they were losing on debit interchange. But unlike with Chase and Wells, there will be no hidden fees. You’ll know exactly what you’re paying to have access to your cash, and you’ll know exactly what you’re paying to move it around (a quarter).

Ultimately, Dwolla Instant delivers the most value to merchants, who would be able to sidestep payments processors (and PayPal, too, which charges fees of about 3% of all transfers, plus $0.30). And this is, after all, the ultimate goal of the product: to help merchants avoid paying steep fees for collecting electronic payments. In fact they recently wrote an open letter to Louis CK, who recently sold a comedy special online for just $5 and successfully sidestepped the entertainment industry’s costly distribution mechanisms, pointing out to the comic that had he used Dwolla instead of PayPal he would have made more money still.

It costs money to move money around. But it shouldn’t cost that much, and you should know what you’re paying. That’s Dwolla’s goal, and hopefully merchants recognize the value of it. Will Instant help Dwolla take off? It will require that more merchants accept the platform, and that’s what Dwolla is working on. Focusing on Brooklyn and San Francisco, Dwolla is reaching out to merchants to demonstrate the value of their product, and hope to grow their product from there.

It’s a lean system, and it’s simple. That, Milne stressed to me, is the value that Dwolla will give to both merchants and their clients. That’s the value of the web after all, right? Why should we be layering inefficient and costly systems on top of it?

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  • Sun W. Kim

    PayPal has a feature to use “Instant Transfer” via eCheck (ACH) with a credit card backup. This sounds like a similar feature except Dwolla wants to charge $3 for it. I think it is wise to make it an opt-in feature, as those of us who can pre-fund, will not be dinged with a service fee. I think with a little planning you, you can avoid these fees. I think the whole notion of credit ($500) is somewhat antithetical  to using bank to bank payment.