Dwolla Looks to Make Its Mark with ‘Near Real-Time’ ACH Transactions

Payments startup Dwolla Corp. eliminated its transaction fee last week on all payments under $10, a bold move in itself, but it apparently has much bigger things in store. For one thing, the Des Moines, Iowa-based company is testing a system that co-founder Ben Milne says will make automated clearing house transactions safer and faster. For another, it has scheduled an announcement for Dec. 15 on a matter it is touting as a major development.

Dwolla is keeping the announcement close to its vest, but Milne tells Digital Transactions News it is not related to its ACH project, which is aimed at adding authorization and authentication to the network as it connects to Dwolla, allowing transactions to settle faster. ACH transactions cost mere pennies but typically settle the day after they are originated. “Everybody wants it to be real-time,” says Milne, who officially launched Dwolla a year ago after spending several years looking for ways to cut merchants’ payment-acceptance costs.

Milne says Dwolla is “prototyping” its ACH solution with two financial institutions, one of which is Veridian Credit Union, based in Waterloo, Iowa, and known until five years ago as John Deere Employees Credit Union. He won’t name the other institution. Veridian’s investment arm, Veridian Group Inc., invested $1 million in Dwolla last December, along with The Members Group, a credit union service organization based in Des Moines.

In a development not related to Dwolla, a proposed rule change that would allow for same-day settlement emerged this fall from NACHA, the regulatory body for the ACH. If approved by NACHA members, the change would go into effect in March 2013. Milne says same-day settlement is fine but not fast enough. “Same-day has a ton of value, but it’s kind of a band-aid,” he says. “The ultimate goal is really instant [transfers].” A NACHA spokesperson said by e-mail that the organization has no comment on Dwolla.

Currently, Dwolla uses the ACH to transfer funds from users’ bank accounts to their Dwolla accounts. With these accounts, users can pay merchants or other individuals. Transfers between these accounts occur in real time. Transactions cost a flat 25 cents each, though those under $10 have been free since Dec. 1. With transactions originating from PCs, the sender can choose whether he or the recipient pays the fee. With mobile payments, the recipient pays. Using Dwolla’s software, users can integrate payments with social networks, letting friends in on where they’re shopping, what they’ve bought, and what they’ve paid.

The startup has attracted 70,000 users so far, the vast bulk of whom have signed up since the December 2010 launch. It has recruited more than 3,000 merchants and is signing up new ones at the rate of more than 100 a day, Milne says. “We’re experiencing early-stage validation that our core product resonates with people,” he says.

Part of Dwolla’s strategy is to work with The Members Group to recruit financial institutions to offer the service as part of the accounts they open for customers and members. Brian Day, Dwolla product leader at TMG, says six credit unions now have live integrations with Dwolla “and several others are in the queue.”

But with pressure building in the industry to make the low-cost ACH a faster transaction network, Dwolla may ultimately make its mark with the solution it is working on with Veridian and the other, unnamed institution. The ACH’s great advantage is that it reaches nearly every financial institution in the country, but with its low cost comes disadvantages such as a lack of authentication. At the same time, the emergence of new technologies such as mobile payments has fostered expectations that transactions should flow faster than the ACH allows.

Milne says Dwolla is working on replacing the ACH’s transfer of conventional batch files with Web services and its own application programming interface (API). Web services refer to protocols for computer-to-computer communication. If the  “become near real-time,” Milne says. Dwolla’s partner sees advantages in that, as well. “We’re in tune with and in favor of anything that speeds [the ACH] up,” says Day.