NPR Story
4:30 pm
Wed October 30, 2013

Company Aims To Go Beyond Credit Cards

Originally published on Wed October 30, 2013 5:29 pm

Businesses frustrated by the fees they pay to credit card companies are looking at a European Union proposal that would reduce the swipe fees merchants have to pay every time a customer pays with a card.

The EU proposal calls for a cap on the swipe fees of 0.3 percent of the amount charged to a card — far lower than the 2 to 4 percent typically charged now.

According to Roll Call, credit card swipe fees have tripled in the past decade. And entrepreneur Ben Milne says there’s another way.

Milne is founder of the company Dwolla, which offers a digital payment system that could allow stores to bypass the need for credit card networks and pay lower fees.

Interview Highlights

On how Dwolla works

“You just basically pull up your phone, type in a phone number, email address, or if they’re already in the network, you just search their name just like a friend on Facebook. Hit pay, how much, and the money just moves.”

On bringing down the cost

“The fees that come into a credit card system really pay for the infrastructure to support it: All the people that are doing the sales, all the hardware, all the old systems, the fraud protection inside of it. When you just remove all that stuff, when you don’t have to mail anything anymore, you can actually remove a ton of fees just by building a new system. I mean, the internet really just lets us cheat.”

On his experience with credit card fees

“There was a point where [our small business] realized that there was about $55,000 a year in credit card fees that we were paying, and for whatever reason, I couldn’t let that go at the time. And so I guess I looked at that $55,000 for a small business that really only employed 10 to 12 people. That was a new employee so I could take some time off; that was a new product line so the company could make more money. You know, there were so many things that as a small business owner I feel like I could have done with that, and I don’t think I’m alone. I know there are a lot of small business that are getting eaten by the fees.”

Guest

Copyright 2013 WBUR-FM. To see more, visit http://www.wbur.org.

Transcript

ROBIN YOUNG, HOST:

It's HERE AND NOW.

The Merchants Payments Coalition, that's a group of stores lobbying for lower credit card fees, released a study this month that found that more than 150,000 jobs could be created annually if the swipe fees that businesses have to pay to credit and debit card companies were significantly reduced. Those fees have tripled in the last decade, according to Roll Call.

Well, our next guest says there might be an even cheaper way. Ben Milne is founder of the start-up Dwolla, as in the dollar plus Web. That's an online payment system that bypasses credit cards and charges lower fees. The MIT Technology Review says they're on track to process over a billion dollars this year, and they're in the process of connecting with all financial institutions for all transactions. Bill Milne joins us in the studio. Welcome.

BEN MILNE: Thank you.

YOUNG: How do you this? I mean, businesses are using it for daily transactions. People can also use it instead of checks. How is this different, let's say, from PayPal?

MILNE: Yeah, sure. I mean, PayPal takes in a bunch of different types of payments, so Visa, MasterCard, Discover, you know, all these essentially plastic cards that allows you to pay a merchant. So it's not too much different than kind of going into a retail store and making a payment, then you have all these providers and technology that kind of transfers that money.

Dwolla bypasses all the fees by building our own network. We basically took the Internet and used the Internet to replace the entire infrastructure that supports a plastic card. The Internet wasn't around 20 or 30 years ago or 40 years ago when a lot of these companies really started the scale. We use the Internet to transfer money between people for whatever reason. And data is basically free these days and everything is connected, so why not?

YOUNG: Let's say I'm in the store and I'm purchasing something. Can I do it through Dwolla if the store isn't in your system?

MILNE: So you could, but I don't know if they would give you the goods or services that you're trying to purchase. Most of the people that are in the network that would go into a retail store, they would know beforehand that it's some - it's a store that already participates in the network.

YOUNG: How many do you have?

MILNE: I think right now we're just under 30,000 retail locations. And, you know, that grows more and more every single day.

YOUNG: Let's say I'd like to pay someone for something, but I don't want to use a credit card. Take me through the steps of how I would do that through Dwolla.

MILNE: If they were in front of you, you just basically pull up your phone, type in, like, a phone number, email address. Or if they're already in the network, just search their name, just like a friend on Facebook, hit pay, how much, and the money just moves.

YOUNG: But how does it move? Because presumably it moves from your bank to their bank. So how do banks get involved?

MILNE: Yup. So what we do is we connect to all banks through something called the ACH system. And then we built our own proprietary set of rails and something called vising(ph) the banks are connecting to. When they connect to that network, transactions are through real time, which is something the market today doesn't have. And we also allow financial institutions to connect to the network to do things like loan money instantaneously to other people.

YOUNG: So you say ACH system. This is the Automated Clearing House. That's a bank-to-bank transfer system. This is the one that credit cards depend on. But are you saying you get the system but don't charge the fee? I mean, if you're using the same system, how does that work?

MILNE: So we utilize that system and then we layer on our own technologies. The fees that come into a credit card system really pay for the infrastructure to support it: all the people that are doing the sales, all the hardware, all the old systems, the fraud protection inside of it. When you just remove all that stuff, when you don't have to mail anything anymore, you can actually remove a ton of fees just by building a new system. I mean, the Internet really just lets us cheat.

YOUNG: It lets you cheat. OK. Well - OK, we've got lots of questions. So let's say you're enabling me to pay someone for something. I type the number in. This other person is in the system. My bank gives the money to their bank with no middle person, no credit card company charging fees. How much are you charging?

MILNE: There's no percentage fee. Everything under $10 is completely free. So on our transactions over $11 up to 11 million, 100 million, that number becomes arbitrary. We charge 25 cents a transaction. I mean, the amount of data that's passing is relatively minimal. So our feeling is that if it's minimal in terms of data, then we'll just charge you the same thing. And inside of that 25 cents, there's enough profit for us to actually build a company on top of.

YOUNG: Yeah. Aaron McPherson of IDC Financial Insights told the Des Moines Register, I don't see how they're going to make money on this. Can you employ people? Can you grow?

MILNE: Yeah, absolutely. So, you know, while we do have traditional venture financing, the company right now, today, is I think maybe 55. Engineering teams is still small, but 15 to 17 primarily based in Des Moines. But that team was, you know, four, five a year ago.

YOUNG: Well - but here's the thing. You mentioned that some of the fees that you remove cover things like fraud. And when I use my card, when I travel and I'm not where I usually am, I get a call from Visa. What do you say to people who might be worried that when you cut in those fees, you might be cutting out protection against things like fraud?

MILNE: Well, I think that there may be kind of a misperception there. One of our first investors actually provides security services to banks and credit unions that it services, so it very heavily guided our infrastructure for controlling and monitoring fraud. And to this day, we have lower-than-industry average losses on fraud.

YOUNG: You mentioned Des Moines. You weren't - this is not a - you go to Silicon Valley to get your investors. But you're based in Des Moines still?

MILNE: We are based in Des Moines. We also have offices in San Francisco close to our investors and also in New York close to our investors. And, you know, one of the things that we always said that we were going to do was build a talent pipeline throughout the country and really take advantage of different geographies' talents. And that's exactly what we've done, which means we've got a lot of really strong people in financial services in Des Moines, Iowa.

YOUNG: What are you worried about the downsides of this? I'm trying to think how often I use my credit card. We're a society that doesn't use cash that much anymore. And I'm just thinking how would I feel about, you know, going to my phone and tapping something in and hoping that the other person is on the system on the other side.

MILNE: You know, I think that education is definitely a problem. But as payment behavior kind of evolves - cards are something we didn't have, you know, 60, 70 years ago. We had a different behavior. And, you know, probably 20 years from now, we're going to have another one. And at the end of the day, it doesn't matter how seemingly complex this thing is. It needs to facilitate you getting what you want faster. And if we do it right, you should utilize our rails, and it should just work.

YOUNG: Do you ever step back, Ben Milne, and say, what have I done here? Because we understand that you were somebody who puttered around. You were selling speakers when you said, gee, I don't know, this - what are all these fees that I'm paying, and you decided to come up with a better way. What was the light bulb, a-ha moment of I got to do something better?

MILNE: There was a point where we realized that there was about $55,000 a year in credit card fees that we were paying. And for whatever reason, I couldn't let that go at that time. And so I guess I looked at that $55,000 for a small business that really only employed 10, 12 people. That was a new employee so I could take some time off. That was a new product line so the company can make more money. You know, there are so many things that as a small business owner I feel like I could have done with that, and I don't think I'm alone. I know there's a lot of small businesses that are just - they're getting eaten by the fees.

YOUNG: Let's say you had that same exact company, and instead of using credit cards and having that - those fees, you were using Dwolla. What might your fees be reduced to?

MILNE: Oh, man. I mean, I would say out of the $55,000 a year I was paying, it probably would have been less than $1,000. You know, at the end of the day, if Dwolla would have existed back then, I never would have built Dwolla. I would have just used that service.

YOUNG: And so you built it. One very last question. We read in the MIT Technology Review that you were inspired in part by your dad, who just sort of - he was one of those I-need-this-so-I'll-build-it guys.

MILNE: I think that's true. I mean time's limited.

YOUNG: So go start out an entire banking system from scratch. That's Ben Milne, founder of the digital money payment system Dwolla. Thanks so much.

MILNE: Thank you for having me.

YOUNG: So have you gone Dwolla? Let us know at hereandnow.org. Transcript provided by NPR, Copyright NPR.

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