Mobile Payments without Credit CardsBy Adrian Lane
The San Francisco Chronicle ran an interesting story about a small payment processing firm that is trying to disintermediate credit card companies. But they are doing it the old fashioned way – cutting out the middleman and going direct to banks to move money for them. Dwolla is a start-up payment processor providing person-to-person payment via mobile and social media outlets. Their hook is providing payment at a substantially reduced reduced commission – just twenty-five cents ($0.25) per transaction. Compare that to credit card companies that charge a flat 3%, or PayPal, who changes thirty cents per transaction in addition to 2.9% (less 2.2% for volume sellers). Dwolla’s offering can be viewed as similar to PayPal’s or an ATM transaction, but ATM fees have escalated into the $3-10 range. With mobile payment in its infancy, this space is a greenfield for startups and established players to redefine what’s possible.
Credit card companies have been talking up the benefits of mobile payments for years as an easier and more pleasurable shopping experience – but today many of their solutions have not yet been delivered to the market. The promised benefit to merchants is rather nebulous growth in “customer loyalty” and data on purchasing history. Cold hard cash would be preferable, which is why I think many small merchants are going to like Dwolla’s offering. When it comes down to it 3% may not sound like much, but it’s a lot of money for many merchants struggling to be competitive. Popular sentiment doesn’t hurt either, especially in light of consumer dissatisfaction with credit card companies (despite overall credit card use going up), and many halting use of cards because they make spending too easy.
As far as security goes, not much information is available on Dwolla’s security model for establishing user identity. What’s described sounds similar to existing models based on a combination device (phone) verification, a password, and location-based services. But it’s not their security model that interests me – it’s that this is one of the first upstarts I have seen really breaking the old mold of how payments are done, and it looks promisingly disruptive. The concept is not new, but it’s one of the first times someone has pulled off the direct-to-bank model and demonstrated a new concept of what mobile payments can be. For banks willing to take some risk on the security and legality of person-to-person or mobile payments, Dwolla offers both a new revenue model and a means to strengthen customer relationships. Keep in mind that many banks offer credit cards expressly to be foremost in the consumer’s mind when looking for auto or home loans – loans being the principal source of bank revenue. While that sounds like a no-brainer, I can tell you from personal experience that most banks won’t touch this concept with a 20’ pole because of the risk to their banking charters in this heavily regulated sector. But the market usually rewards efficiency, and if someone can offer convenient payment services at a reduced cost they are likely to win market share in a hurry. Dwolla sounds like they have a recipe for success.
The easy part of any payment system is the average, everyday payment itself. That is, the vast majority of the time, everything works fine. It is that small share of transactions, however, that always trips up new entrants, e.g., chargebacks, refunds, disputed transactions, fraud. In my experience, their inability to handle exception items is why the telecoms, for example, have never been able to break into the payments market.
It will be interesting to see how Dwolla handles that small percent of troublesome transactions. That may ultimately determine (IMHO) their success as a payment alternative.
By Walt Conway