The 28-Year-Old Out to Kill Credit Cards and PayPal
Business + Economy

The 28-Year-Old Out to Kill Credit Cards and PayPal

There's a tiny 12-person startup churning out of Des Moines, Iowa.

Dwolla was founded by 28-year-old Ben Milne; it's an innovative online payment system that sidesteps credit cards completely.

Milne has no finance background yet his little operation is moving between $30 and $50 million per month; it's on track to move more than $350 million in the next year.

Unlike PayPal, Dwolla doesn't take a percentage of the transaction. It only asks for $0.25 whether it's moving $1 or $1,000.

We interviewed Milne about how he is building a credit card killer and Square rival from the middle of the nation where VCs and press are scarce.

BI: We hear you're making credit card companies angry. How are you doing that?

Ben Milne: Ultimately we're trying to build the next Visa, not the next PayPal. We're building a human network based on how we think the future of payments will work. The current model needs to be blown up.

Dwolla started out of my old company. I owned a speaker manufacturing company and we sold everything directly through a website. I got really obsessed with interchange fees and how not to pay them. Every time a merchant gets paid with a credit card they have to give up a percentage. In my case, I was losing $55,000 a year to credit card companies. I felt like they were stealing from me -- I was getting paid and somebody was taking money out of my pocket.

So I thought, how do I get paid through a website without paying credit card fees? We pitched a bank, and amazingly enough they said, "We'll give it a shot."

That was three years ago, so we've been working on the project for a really long time. In December of last year we figured out how to legally do what we do.

How many transactions are you doing?

The average transaction volume for Dwolla is right around $500 dollars. We move between $30 and $50 million per month.

What's your story?

I'm 28. I started my first company, Elemental Design, when I was 18. I dropped out of University of Northern Iowa and built that.

I started college because I thought that's where I was supposed to go. I applied to one college, I got in, went, and realized it wasn't for me. I had customers so I stopped going to class.

We grew that company from a $1,200 investment to over one million in revenue in four years with three or four people and without outside investment. The company was running itself and I wanted to work on another project.

You don't have a finance background and yet you built Dwolla?

It's been helpful in some strange ways. I think the first financial institution we went into only listened to me for entertainment. They let me get in to pitch the full executive team at the bank.

I don't look like a banker, they knew I didn't have a banking background. They actually agreed to work with Dwolla after two hours of arguing with me and me scribbling on a whiteboard about how the whole thing could work.

Had I been more typical, maybe they wouldn't have listened to me. In that respect, I think that not knowing how the mechanics worked was good — we just knew the way we wanted them to work.

What did you do for the first two years when Dwolla wasn't technically legal?

Well it was legal, we just couldn't operate outside of Iowa. For the first two years we built out the platform. We did a sh*tload of testing on a small scale because legally we couldn't launch Dwolla nationwide. We spent two years inside of Iowa fine-tuning Dwolla with the financial institutions, building out some of the initial models, and trying to figure out how to legally do what we do.

How'd you find a legal loophole?

Moving money is an exceptionally regulated business. We're in Iowa, which is sort of conservative — I don't know if that helped us or hurt us, but in the long term I think it helped us. We figured to do this legally, we had two options: we could take in a tremendous amount of money and go out and get licenses, which is how most people do it. But we didn't have access to that kind of capital here.

The other option was to bring in really strategic investors, which is what we did. One of our investors is a financial institution; one is a financial services company.

Our investors do credit and debit processing for banks. So when you get a credit card from your bank, it's being issued by companies like them. Our investors are also distributing our product to financial institutions. So we've been building a payment network, and we can do it legally because of who our investors are.

We launched in December of last year and started moving $50,000 a week. Now we're hovering around $1 million a day. We hit that milestone in June or July.

Now we've quieted things down. We had to tap the brakes because the way you handle money needs to be managed correctly. We have some new partners on board and we're going to hit it hard in December again. We've got some stuff coming out in December that we think should be really big.

How does Dwolla work and how is it different from PayPal?

With Dwolla, payments are made directly from your bank account. No credit or debit cards are allowed. And because they don't exist in the system, we don't have to bring the fees into the system.

You can spend any amount of money and when you do that, the person on the other end doesn't have to pay 1, 2, 3 or 4%. They only pay $0.25 a transaction, which is especially helpful when it's $1,000, $2,000 or $5,000 transactions. Obviously PayPal becomes very cost prohibitive with those larger transactions.

The biggest difference between ideas like this and a PayPal — and PayPal is a phenomenal idea, Square is too — is that those are built on top of networks like Visa and MasterCard. We're building our own.

Can users only send money to Dwolla members?

No, you can send money to anyone. Only the person sending it has to have a Dwolla account to initiate the transaction. The person receiving it will have to sign up for an account, but we've been surprised at the conversion there. It's worked relatively well. We leverage social networks really heavily as contact lists, which is one thing we do really different. You can send money with an email address or with a phone number, but the most popular way to do it is to connect to Facebook and type in a friend's name.

We think, in the long term, sending money should be as easy and effortless as finding a friend on Facebook. That's really a behavior we try to mimic when it comes to peer-to -eer payments. When someone does not have a Dwolla account, they get a wall post that says, "You've got money." If a friend sent that to you and it was their name and their face, you would have a different emotional connection to that than an arbitrary email from It's a totally different interaction and one that's been really helpful for us in converting users into the system.

What kind of purchases and money transfers is Dwolla being used for?

We do pretty well in B2B; 11% of our business is person-to-person, and the large majority is business-to-business, consumer-to-business, and business-to-consumer. The platform was originally built for taking in payments through websites, and we have APIs that allow you to do that. We haven't experienced the scale on those quite yet.

Where we've seen a ton of transactions right now is with people paying monthly rent. If I'm a landlord and I want to collect it, taking a credit card payment means missing out on 3% of an $1800 charge. Dwolla is $0.25 cents.

The average Dwolla transaction is right around $500. PayPal takes 2.9% plus $.30 a transaction.

Why hasn't anyone side-stepped the credit card companies before?

I think a lot of it is timing and luck. And a little bit of getting your foot in the door. One of our investors is a $1.8 billion financial institution. That's atypical anywhere, let alone in Iowa. Having them on board allowed us to get into a lot of rooms.

We serve everyone from the landlord taking in one payment to the individual buying a coffee with their cellphone, to billion-dollar corporations. Because we're so atypical and look at mobile payments differently, we got in the room with the Federal Reserve and the U.S. Treasury who allowed us to have a conversation, not only from a corporate standpoint, but from a government monetary distribution standpoint.

All banks are connected by one ACH system. Credit card companies utilize that same system to pay off your credit card charges. Banks internally set along that same system to move money in their own banks. This system in its own right is riddled with flaws — tons of fraud issues and waste and delays. If you've ever had a payment take a few days to clear, its because they're waiting on that ACH system.

We want to fix that system between the banks, take out the delays and make it instant. If we can create this ubiquitous cash layer of distribution between consumers and merchants and developers and financial institutions, that actually fixes the problem.

No one has built a payment network in 30 years — since credit cards. Everybody has concentrated on how we build a portal for credit cards, from digital wallets to Square.

We don't believe in credit cards. We believe in authorization and in lower cost transfers. Our generation actually understands that when you buy sh*t, it comes out of your bank account and you have to pay for that.

Since you're hooked up to bank accounts, users don't have to have money in a Dwolla account to make a transfer?

You can hold money inside of Dwolla but you don't have to. We're finding a lot of consumers want to hold it there. There is actually a positive average balance inside of Dwolla for each consumer. We also have businesses that use Dwolla to do payroll, so they'll keep a balance in there to cover the cost.

You could have an account of $0 in Dwolla and there would be no fee?

The only fee would be if someone paid you. We take a quarter. We really want that quarter. It's all we want!

How do Dwolla's mobile payments work?

We built out a mobile facing system; your mobile phone is just a different view of a website, so a mobile payment is just an authorization on your cell phone.

We take the website, plop it into the cell phone, start adding proximity solutions so you can see which Dwolla merchants are close to you, and then make it easy to pay once you go into a store that accepts our system. Dwolla uses the GPS feature and allows you to make a payment in real-time.

So you're saying if a Starbucks accepts Dwolla I'll be able to see that on a Google Map, go there and charge the coffee to my phone?

Yes, you'll just walk into the store and pay. It's like checking in on Foursquare, you're just paying instead of checking in.

We started in one coffee shop and now we're working with 400 or 500 merchants. Part of us scaling out is we have to pick inflection points and then do some hiring to actively pursue those communities and integrate with them. We'll be beginning that in December.

Do banks have to pay to be integrated with Dwolla?

No, we just give them the service and then your bank account comes with Dwolla. There are 16 banks across the country that come with Dwolla. We're talking to some huge financial institutions about doing the same thing.

Banks are going to have trouble being relevant in mobile. The fundamental issue with mobile payments is: how do you get to your cash regardless of where you bank? No one has cracked that nut. I truly feel like we've not only cracked that nut but we're already selling it into financial institutions.

You don't have to pay the banks anything to log in and access accounts?

Nope. We built a web service that connects with the financial institutions and we do not have to pay them to work with them. We're a service provider to them and we work at the same time to make their customers happy.

Who are your investors?

We've raised $1.3 million.

You ever hear of John Deere tractors? They have a bank, Verdian Credit Union, but essentially it's John Deere's bank. Veridian is one of our primary investors. The other investor is a company called The Members Group which provides credit, debit, ACH and security solutions to banks and credit unions.

How big is the Dwolla team?

We're about 12 people — that's a beast of a startup in Iowa. We were smaller last December, about 2 or 3 people, so we've had pretty good growth. Most everyone is in Des Moines.

We've experienced strong early stage validation and have generated revenue that says "Hey, this thing can work well." We've got this little fire and now we're trying to figure out how to pour a sh*tload of gas on it, and really make this scale out. The beginning of that is in December and right now we're trying to ensure we have the right partners to really kick that thing off really hard.

What happens in December?

Oh, it's going to be good.

What is it?

We've got this product coming out in December that solves a whole bunch of really big problems inside of the ACH system, which all banks are connected to, and it does it in a way that's never been done before.

Are you raising capital?

We have a lot of really positive conversations going on at the moment and we're trying to figure out who the right partner to work with is. We're fortunate that our current investors are very supportive of what we're doing.

How are you doing all this from Iowa? It seems like this company should be on Wall Street.

Maybe. Right now Des Moines is the right place for us to be. In the future there's going to have to be a lot of business development outside of Des Moines and there are some things we won't be able to do from here.

If we can convince people in Iowa, who are more conservative by nature, to use Dwolla then my personal feeling is we've really got something there. Had we been outside of Iowa, maybe we would have tried to scale things up too quickly and maybe it would have blown up in our faces. Maybe not.

In my own naive way, I would never build a company anywhere but Iowa so maybe I just don't know any better. My personal feeling is, if you want to build it, where you are is just an excuse. Figure out what the area has to offer you and then leverage that. Hustle your ass off and make it work.