How Dwolla Works

Dwolla cuts credit cards out of transactions. But why does that make payments cheaper?

Here’s the short version of how Dwolla works: It transfers money directly from your bank account to the bank account of someone who you want to pay. For free—if the transaction is less than $10. And for $.25 if it’s more than that. That is less than a credit card company would charge you.

But wait. Aren’t credit cards essentially just moving money from bank account to bank account, too? Shouldn’t they run into about the same fees for doing so? Get ready for the long answer.

"That 16-digit card number, when it’s left behind, or when it’s used at all, one, the fees to essentially move the money can't really go away, because they have to support that infrastructure, and a huge part of that infrastructure is not necessarily the reduction of fraud on the front end, it's already a loss baked into the entire cost of the whole network," Dwolla founder and CEO Ben Milne told Fast Company at a meeting in New York City this August. "You just can’t remove it. It’s not coming out."

A credit card transaction isn’t simple. It’s a complicated process (I often imagine a Rube Goldberg machine) involving players you’ve never heard of that have functions such as "merchant service provider" and nonsensical charges such as "acquirer processing fee." Dwolla cuts all of this out with the credit card number.


"It’s like if you have a landline phone, you can’t not use the copper in the wall," Milne says. "If you want to reduce the cost of copper, you need to use a wireless phone. You remove hardware. You remove infrastructure."

It took Milne, he admits, years of seriously geeking out to figure out how payments work. If you don’t have that long, this infographic helps.

[Image: Flickr user Craig A Rodway]

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  • Confused

    I agree.  Still know nothing about Dwolla. Article should be titled, "How Credit Card Transactions Work."

  • Tim Bannister

    As a merchant who accepts Credit Cards I can tell you first hand that this industry is one of the most corrupt I have dealt with. I now use square and couldn't be happier, that is unless I was using Dwolla! I was new and under-informed when I first set up the CC system. Paying $35 per month (4 year lease) for a $125 machine (new online). Paying non-compliance fees for failing to complete one of the most complicated surveys ever written. Have you ever spent an hour with a merchant services sales rep? If you have you know how corrupt it is! I have averaged 4-6 call a week from these vultures and would not go back even if they told me I would be paid to take a card. Credit Cards like the government have created infrastructure so thick it can no longer be easily navigated. What Dwolla has done was strip the vegetation back making life simpler and cheaper! Maybe the guy ought to run the country also! He's got my vote

  • Brianr85

    As someone who has been in the merchant services industry for over 20 years, this definitely is legit.

    The reason you may not be able to understand it is simple: the banks have successfully programmed you to believe it HAS to be complex and costly.  I assure you it doesn't.

    The reality is that there are many "middle men" in the typical cc transaction who all want their cut for actually doing very little.

  • RockIslandLine

     Sure, but what is the minimum path?  The infographic tells us that it's complicated now, but provides zero actual information.  Which parts are irrelevant and why?

  • MF

    This doesn't show what Dwolla does differently. They can try to cut out the credit card issuing banks, but they're just replacing the CC issuer with the customers retail (checking/savings) bank. And you're still going to have processing fees, fraud (possibly even more), overdraft fees, and NSF situations.  Not much different than what happens now, except if a customer is hit with fraudulent charges, their checking /savings acct can be wiped out leaving them with NO MONEY for day to day expenses.  Which makes me wonder what is Dwolla going to do to make their scheme more secure and less hackable than the current payment systems ? I dont buy any of their claims.

  • Adam Quirk

    This is interesting and all, but does literally nothing to explain how Dwolla actually works. It sounds like the underwear gnomes. Step 1. Remove credit card numbers. Step 2. ? Step 3. Profit.