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.

Huh?

"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]