Retailers like GrandSt.com offer it as a low-cost alternative to credit cards.
GrandSt.com launched last December as a web-only retailer of high-tech games and gadgets like hydrogen-fuel-cell-powered model cars and online board games designed with interactive Bluetooth-enabled dice. With that kind of line-up for tech-savvy shoppers, it also wanted to offer a new kind of online payment option, co-founder Amanda Peyton says.
“We were really interested in emerging systems to create the best experience around purchasing new technology devices,” she says. “As a brand, we stand for innovative products, so supporting innovation across our whole business, including the online payments, was important to us.”
In addition to paying with credit and debit cards, customers on GrandSt.com can also pay with Dwolla Credit, a new online payment service launched this week by Dwolla Corp. that operates outside of established payment card networks like Visa, MasterCard and American Express.
Steve Mott, who operates the payment consulting firm BetterBuyDesign, says that, by avoiding the fees charged by established payment card networks Dwolla Credit appears to be offering merchants “the first meaningful change in 20th Century business models for payment transactions, bringing the payment industry into the 21st Century.”
Dwolla Corp. operates with its own payment network, but until this week it only offered consumers the option of making online and mobile payments with a stored-value account that consumers typically load with funds from a bank account. GrandSt.com is one of about 40 merchants offering Dwolla Credit as a payment option under a beta program. Dwolla plans to make the credit program generally available early next year.
Dwolla Credit lets consumers carry a balance as with any credit card, but without using a plastic card, says Alex Traub, the company’s head of business development. The credit service is being underwritten by Comenity Capital Bank, which is a banking subsidiary of Alliance Data Retail Services.
To complete a payment with Dwolla Credit, users take the same steps as with the Dwolla stored-value option: they enter a user name, password and a four-digit personal identification number.
Unlike with payment card networks, however, merchants do not pay Dwolla network transaction fees, which typically run 2% to 3% of transaction value through traditional credit card networks. Dwolla charges a flat fee of 25 cents for each payment transaction valued at $10 or more. It charges no fees for transactions valued at less than $10, and it charges no set-up fees.
While it’s a good deal for merchants, Dwolla Credit can be costly for consumers who do not pay off their balances right by the monthly due date. Consumers pay interest on outstanding balances, and 24.99% is a typical rate, says a spokeswoman for Comenity Capital Bank, which will underwrite the credit option. She notes the annual percentage rate varies with each Dwolla Credit account. Account holders are also charged a $35 late fee if they don’t make a minimum payment by their monthly due date. By comparison, the national average across the United States for credit card annual percentage rates as of Oct. 24 was 15.03%, with an average rate 23.48% for account holders with bad credit histories, according to CreditCards.com, a comparison site for credit card offers.
Comenity Capital Bank also underwrites consumer credit transactions for Bill Me Later, a delayed payment invoicing service that is a subsidiary of eBay Inc.’s PayPal payment service. Bill Me Later is under investigation by the U.S. Consumer Financial Protection Bureau for potential consumer abuses related to its lending practices.
With Comenity Capital Bank extending credit to consumers, Dwolla does not need to rely on the banks associated with established credit card networks like Visa, MasterCard and American Express to take on the risk that consumers won’t pay their bills. Because it doesn’t need to work through the existing payment card networks, Dwolla can afford to charge only 25 cents per transaction, says Ben Milne, Dwolla’s co-founder and CEO. The company supports consumer-to-consumer transactions as well as transactions among consumers and businesses, and its long-range plan is to grow through handling a large volume of transactions, he adds.
Mott of BetterBuyDesign contends that traditional payment card networks have become overly complicated in how they process authorizations and settlements with banks and deal with the security of transactions carrying payment card account numbers.
By comparison, he says, Dwolla has established a relatively simplified payment transaction network that processes all payment transactions with Comenity Capital Bank. He estimates that it may cost Dwolla far less than 25 cents to process each transaction, enabling it to earn a return at its 25-cent per transaction fee.
Dwolla declines to comment further on how it decided on the 25-cent fee, but notes that it has no plans to raise it, a spokesman says. To help keep costs down, the company will apply additional security requirements on merchants and account holders if necessary to help block fraudulent transactions, he says. Dwolla declines to comment further on those requirements, but notes that they have not been applied to any merchants.
Individuals can use Dwolla Credit to purchase up to $5,000 worth of goods in any single transaction, though Dwolla sets no limit on the number of transactions valued at $5,000 sent within any period of time. Businesses with a commercial Dwolla account can spend up to $10,000 per transaction, but can also apply for the ability to transfer up to $50 million in a single transaction, the company says.
Dwolla, which launched as a company in 2009, is backed by about $22 million in venture capital from firms including The Members Group, The Veridian Group, Union Square Ventures, Thrive Capital, Village Ventures and Andreesen Horowitz. Milne says Dwolla chose to work with these venture capital firms because they were willing to let the company grow over the long term through transaction volume, rather than building revenue faster by charging higher fees per transaction.