For years, the U.S. payment system had been static, in need of disruption. Transfers between bank accounts took up to five days to complete, leaving your money stuck in limbo that entire time.
However, change is finally coming to money transfers in earnest, with real-time payments (RTP) and same-day ACH becoming a reality. And that’s just the beginning. “In maybe another six months, you're actually taking out the same-day aspect, and you're going soup-to-nuts, end-to-end in a couple seconds,” Dwolla founder Ben Milne says. “What happens to consumer experience when everything can be that fast?”
Milne started Dwolla in 2010 on the idea that moving money should be simple and affordable for everyone. The company relaunched in 2016 with a new focus: a programmable payments API that uses automation and keeps costs staggeringly low, ultimately a way for merchants to accept payments without paying the exorbitantly high credit card fees.
“If you just teach the technology to do things like protect the developer and get the developer as close as possible to the Fed — which is what Dwolla has now done — you can eradicate a ton of cost and you can eradicate a ton of complexity,” he says.
Last week, Unifimoney announced our partnership with Astra to create automated, streamlined transfers between accounts. Dwolla is the API that powers Astra and many other innovative Fintechs. We gave Milne a call to learn more about building Dwolla from scratch and what happens to the way we interact with money when personal finance becomes real-time and cross-platform.
The original company was founded to basically give people an alternative to accepting payments of credit cards. It wasn't difficult; it was borderline impossible to collect or send money directly from a bank account and get around paying credit card fees. The original product was really launched based on the very simple thesis: if you give people access to this tool, they will use it.
It turned out that a million people used it and it was a really interesting product. There were lots of things we needed to change but that was really what Dwolla #1 was all about.
The trick with ACH is that if you go to the Fed and you look at the Fed's published pricing, you can see that the actual cost is less than a cent. It's like a third of a cent. It's ridiculously low. But everything in between a developer and the Fed is just markup and/or risk management and/or irresponsible fraud losses that need to be funded.
So, if you just teach the technology to do things like protect the developer and get the developer as close as possible to the Fed—which is what Dwolla has now done—you can eradicate a ton of cost and you can eradicate a ton of complexity.
One of the advantages to Dwolla #2 is that when we restructured the company and relaunched it in 2016, we got to take all this Fintech infrastructure with us into the second business. So, there's $40 million in R&D and hard Fintech infrastructure the developers now get access to virtually for free. If they want expensive features, they pay a few dollars a month, but it's still ridiculously low cost and fast in comparison to what it was.
It's just automation. So, we let people use it at a low cost and the software does the hard work.
Sometimes it's because they can and sometimes it's because their providers — their FIS, their Jack Henry, their Fiserv — say, 'Well, if you're going to offer ACH, these are the solutions that you use.' Banks and credit unions are not tech companies. They buy from their providers, and then roll up those service costs to their end users, businesses and consumers. If you think about it from a tech-company context, you're thinking about it from the perspective of: what do I need to build? What is really bad that I can replace? And where is my opportunity? But that's not how banks and big credit unions think. It's just not.
Obviously, being around Fintech for a long time, one of the biggest differences is that way back in 2010, we had to build everything. We had to build the ledgering infrastructure. We had to build the contract and the business structure. We had to build the identity-management stack. We had to build the fraud stack. We had to build the compliance stack. We had to build literally everything.
These days, when we onboard a new client now, they don't have to rebuild any of that stuff. They can just program a payment in the API and they're up and running in like days. Whereas, the things that enable those days of development time could have actually been four years of work. It's just insane how much had to be built. Now, so much is reusable.
We had nothing. Literally, someone handed me a Nacha rulebook and, in order to get access to the ACH system, I signed over as collateral my previous business, my house, everything I owned, and had to post money in the bank. So, literally, I signed my whole life over to have the right to drop off an unencrypted batch file with information inside. Everything that came after that, we had to build.
I remember logging into IIS inside of the server and having to reset services to get the file to build and then manually having to go drop off the file and reconcile it personally. Now, billions of dollars splice through all that stuff and it's all automated. It all just works. But, along the way, there's a super complex ledgering and accounting infrastructure that tracks all the money.
That infrastructure was so good, we got to rebuild it with the Bill and Melinda Gates Foundation around their Mojaloop Project for large global telecoms and banks. We built an identity stack to do real-time identity management and verification. All this stuff goes along with it: the backend admin panels and the different formatting for ACH. I mean, after handing over the ACH manual and the rulebook, we had to build everything from that.
With personal finance, we're just observers of our clients. We enable our clients' innovations, and their products stem out across 18 different market verticals and some of those are in consumer products. The overarching trend that seems to be happening right now is, quite frankly, all about speed. ACH was a pain point for a long time; you could make personal finance faster by injecting cash, but that's really expensive so it doesn't work. Same-day ACH makes that a little bit less painful. RTP is making that a lot less painful.
So, where you had this five-day assumption end-to-end over ACH, it's now possible—as of the last three months—same day ACH in and RTP out.
So, you just took four days out, right? Then, in maybe another six months, you're actually taking out the same-day aspect, and you're going soup-to-nuts, end-to-end in a couple seconds. What happens to consumer experience when everything can be that fast? I don't know. But I think it's gonna be a good transition.
Personally, I think there are two things happening that are really going to change the way developers and end users interact with money and assets. One is, quite frankly, speed. RTP coming to market — and FedNow not far behind it — is going to open up the U.S. economy in lots of new ways that I don't think we can predict. That'll run the gamut across everything from consumer finance to fractional ownership and much more.
The other thing is the applications around fractional ownership. It’s now possible for people like you and me to own portions of new types of assets, and that's leading to new types of asset classes being created faster than we can describe. So, as that opens up and liquidity opens up, those things really start to compound in a really big way.
The tail to all of this is that cross-platform finance is finally possible at a rate that's faster than the banks are transacting between themselves. If you can get money between Venmo and PayPal, and then extend that into Coinbase and other financial apps, all of a sudden, you're building this entirely separate financial system.
That new financial system is real-time by default, and company-enabled, not financial institution-enabled.
You put all that stuff together and I don't know what it looks like 10 years from now. But Dwolla will continue to be providing infrastructure when it happens and enabling that innovation. What I do know is that it's a very cool trend.
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