Ben Milne, the founder and chief executive of Dwolla, knows that starting up in the finance industry has its perils. His company operates an alternative payments system for banks, credit unions, as well as small businesses and individuals. In the early days of building Dwolla, Milne relied heavily on conversations with regulators.
"It kept me out of jail, honestly," he candidly told Inc. "When you think about money transmission, you're committing a real crime if you don't do proper account opening, reporting, and licensing. You can't just build all this stuff willy nilly."
In one previous instance, Milne learned that money transmitter licenses were as necessary as they are for facilitating payments in the "post 9/11" world, meaning after anti-terrorism legislation was passed as part of the Patriot Act. Prior to launching Dwolla, he called a local Iowa regulator to inquire if he needed one (as transmitters are expensive, and the laws can vary from state to state), and the answer, he recalls, was a stark: "Yes, you do."
"Had I not had that open dialogue [with regulators], the crushing costs of trying to fix the mistakes would have likely killed the project down the line," Milne said.
Similar to other digital wallets--like Square Cash and Venmo--Dwolla allows users to transfer money directly from their bank account into someone else's. Users sign up online by entering personal information, such as the date of birth and social security number, and bank routing and account numbers, or by syncing directly with popular financial institutions, such as Wells Fargo or Bank of America.
Unlike competitors, which operate on top of debit/credit card rails and take a cut of the transaction, Dwolla says it takes the bulk of its revenue through selling add-on features to its own API (application program interface), which lets businesses easily and quickly transfer funds. According to an article from American Banker, the company has said its "grid" network (software that connects you directly to third-party apps) is more secure than credit cards because users can manage which apps are allowed to access account information.
Though, conversations with regulators notwithstanding, it's worth pointing out that Dwolla was recently fined $100,000 by the Consumer Financial Protection Bureau over cyber defense flaws--because it "failed to employ reasonable and appropriate measures to protect data obtained from consumers from unauthorized access," a regulator told The Fiscal Times.
In a formally issued statement, Dwolla said it had "come to a resolution" with the CFPB, and that the investigation covered a "snapshot in time almost two years ago." Further, it said the CFPB had not found that the company had caused any harm to consumers through its security practices.
As Harriet Pearson, a partner with the law firm Hogan Lovells, told the Times, the investigation signaled that the "bar is getting higher for all companies that collect and manage data to protect it."
Dwolla started by charging 25 cents on customer transfers over $10. Now--as the company shifts over to a more business-focused model--it's free. Dwolla says it's on track to process more than $2 billion in transfers this year, and just passed one million users.
It's also working on building out its own payments network, called FiSync, to be adopted by financial institutions. Though the company declined to discuss how much it aims to sell FiSync for, a spokesman tells Inc. that such contracts could price "extremely well." (It has already inked deals with the Chicago Mercantile Exchange, and with BBVA Compass.)
Last week, Dwolla submitted a proposal to the Federal Reserve's Faster Payments Task Force, an organization to find an alternative to the traditional Automated Clearing House (ACH) system for rapidly processing payments. With the proposal, Dwolla hopes to gain better visibility by expanding the existing FiSync technology to more, major U.S. financial institutions.
Dwolla is well positioned to do so. It has raised more than $32 million in venture capital funding to date, from such notable investors as Andreessen Horowitz, Union Square Ventures, Thrive Capital, and fashion mogul Marc Ecko.
Still, the service is a small fish in a large pond of established players, including Square, Venmo and PayPal. Although it counts high-profile investors, it has yet to see the same transaction volume as those competitors; Braintree, which PayPal acquired in 2013, says it processed $50 billion in payments last year, compared to Dwolla's projected $2 billion in 2016.
The startup insists that building out its own banking infrastructure sets it apart from the pack. "We may not be a household name," says Jordan Lampe, Dwolla's head of communications, "but we have an interface for consumers to use [that's] self-sustaining and scalable."