I started to sign up for this to see what it was all about. It looks exactly like a credit card to me, backed by a bank. Here's the introduction to the standard terms and conditions you get with any credit card application:
> Prior to applying for a Dwolla Credit Account, Comenity Capital Bank requests your consent to provide you important information electronically.
The APR stated in my "prescreened" offer was 24.99%, which is staggering compared to my existing revolving credit accounts. There must be some subtle feature that makes this product novel, but I don't know what it is.
This is why the interchange is not going away from the marketplace - any new CC-like product w/o interchange will be more expensive for 'cardholders' than the current creditcards, simply because credit card issuers can earn their money from the interchange fees that only the merchants care about.
As far as I can tell, it's more similar to BillMeLater than it is to a credit card. The only other information I could find on Dwolla Credit is a support FAQ[1]. Interestingly, the credit provider is Comenity Capital Bank, which is also behind BillMeLater[2].
I still don't completely understand the difference in models between something like Dwolla Credit (or BillMeLater) and a credit card. Why do credit cards cost the merchant 2+%, while Dwolla Credit only costs 25 cents? It seems like the same risks apply.
If I had to guess, one thing that makes services like Dwolla less risky than traditional credit cards is that credit card security is built around end users keeping secret a string of numbers written on a plastic card that they hand out to random strangers on a regular basis. As a secondary fraud-prevention measure, merchants may ask you to sign a receipt that may or may not match the one on the back of your card.
To be fair, there are a number of fraud detection algorithms at play as well, but those algorithms often have wholes in them or come into play only after the fraud has occurred.
As an online service, Dwolla requires users to authenticate directly with them, where they can take steps to mitigate fraud by requiring two-factor authentication, etc. Authentication with merchants is handled via a token-based method. In addition, fraud detection may also be substantially easier because Dwolla is privacy to additional information about its users (IP address, purchase details, cookie tracking, etc.) that may not be available to traditional credit card providers. Dwolla may also be privy to additional information that allows them to assess the credit-worthiness of their customers and minimize the danger of default.
This probably doesn't totally explain how Dwolla dropped the cost of fraud detection down to a flat 25 cents (e.g. it doesn't explain why PayPal charges a percentage-based fee), but I bet it's part of the story.
The bulk of the 2% goes to the bank that issued the card and they are very reluctant to give up that revenue. One big problem is cardholder affinity for rewards (airlines, cashback and such) which apply on 30-50% of processing volume and is pretty expensive.
The issuing bank gets ~2%, which it can take in profit (if there's little competition) or spend it to make sure that the customers use the branded creditcards instead of, say, Dwolla - cashbacks, marketing, lower APR's, airmiles, or whatever else. It's quite a large budget - and if you charge 25 cents from the merchant, then it's hard to compete with a creditcard that could give the customer a dollar cashback for the same purchase.
about your question: admittedly, part of it might be rent-seeking (which would be systemic; I make no attempts at pretending to know everything about the banking system but I wouldnt be surprised). I recall Ben goes into the "why" a bit more in detail somewhere in the early part of his interview with TWiST: http://thisweekinstartups.com/thisweekin-startups/dwolla-ben...
EBay Inc. (EBAY) is facing a probe by the Consumer Financial Protection Bureau over a loan program that mimics a structure used by high-interest lenders to evade state rules before the practice was stamped out by regulators.
The program, called Bill Me Later, is a service of the online marketplace’s PayPal unit that relies on Salt Lake City, Utah-based Comenity Capital Bank to make loans that are then purchased and managed by EBay, according to regulatory filings. Under federal law, banks can lend in any state without being licensed there, or complying with local interest rate caps.
<and>
In 2008 EBay acquired Bill Me Later, which also lets users finance purchases in online markets run by Wal-Mart Stores Inc. (WMT), The Walt Disney Co. (DIS) and Apple Inc. (AAPL) Customers can avoid the annual 19.99 percent rate by paying off the loan before the end of a six-month promotional period. If they pay later, they incur accumulated interest and fees that effectively raise the annual rate.
When Dwolla goes international this will get interesting. Until then a lot of us just shrug. That's not intended as an insult -- I just wish they'd go global already.
The deliberate balkanization of all finance in fiat money will backfire big time. The dinosaurs are simply herding everybody in the direction of bitcoin, and there will be no turning back ;-)
After Dwolla banned Bitcoin transactions I lost most of my interest. Bitpay and Coinbase have much better merchant programs and their fees are much lower.
[+] [-] asciimo|12 years ago|reply
> Prior to applying for a Dwolla Credit Account, Comenity Capital Bank requests your consent to provide you important information electronically.
The APR stated in my "prescreened" offer was 24.99%, which is staggering compared to my existing revolving credit accounts. There must be some subtle feature that makes this product novel, but I don't know what it is.
[+] [-] PeterisP|12 years ago|reply
[+] [-] abuehrle|12 years ago|reply
As far as I can tell, it's more similar to BillMeLater than it is to a credit card. The only other information I could find on Dwolla Credit is a support FAQ[1]. Interestingly, the credit provider is Comenity Capital Bank, which is also behind BillMeLater[2].
I still don't completely understand the difference in models between something like Dwolla Credit (or BillMeLater) and a credit card. Why do credit cards cost the merchant 2+%, while Dwolla Credit only costs 25 cents? It seems like the same risks apply.
[1] http://help.dwolla.com/customer/portal/articles/1330333-cred...
[2] https://www.billmelater.com/help/index.xhtml
[+] [-] andrewfong|12 years ago|reply
To be fair, there are a number of fraud detection algorithms at play as well, but those algorithms often have wholes in them or come into play only after the fraud has occurred.
As an online service, Dwolla requires users to authenticate directly with them, where they can take steps to mitigate fraud by requiring two-factor authentication, etc. Authentication with merchants is handled via a token-based method. In addition, fraud detection may also be substantially easier because Dwolla is privacy to additional information about its users (IP address, purchase details, cookie tracking, etc.) that may not be available to traditional credit card providers. Dwolla may also be privy to additional information that allows them to assess the credit-worthiness of their customers and minimize the danger of default.
This probably doesn't totally explain how Dwolla dropped the cost of fraud detection down to a flat 25 cents (e.g. it doesn't explain why PayPal charges a percentage-based fee), but I bet it's part of the story.
[+] [-] pbreit|12 years ago|reply
[+] [-] PeterisP|12 years ago|reply
[+] [-] jeffreyjflim|12 years ago|reply
[+] [-] Johnie|12 years ago|reply
http://www.bloomberg.com/news/2013-10-22/ebay-probed-by-regu...
EBay Inc. (EBAY) is facing a probe by the Consumer Financial Protection Bureau over a loan program that mimics a structure used by high-interest lenders to evade state rules before the practice was stamped out by regulators. The program, called Bill Me Later, is a service of the online marketplace’s PayPal unit that relies on Salt Lake City, Utah-based Comenity Capital Bank to make loans that are then purchased and managed by EBay, according to regulatory filings. Under federal law, banks can lend in any state without being licensed there, or complying with local interest rate caps.
<and> In 2008 EBay acquired Bill Me Later, which also lets users finance purchases in online markets run by Wal-Mart Stores Inc. (WMT), The Walt Disney Co. (DIS) and Apple Inc. (AAPL) Customers can avoid the annual 19.99 percent rate by paying off the loan before the end of a six-month promotional period. If they pay later, they incur accumulated interest and fees that effectively raise the annual rate.
[+] [-] traskjd|12 years ago|reply
Signed, A New Zealander.
[+] [-] fatca|12 years ago|reply
[+] [-] jeffreyjflim|12 years ago|reply
Signed, A Singaporean!
[+] [-] fatca|12 years ago|reply
[+] [-] andrewfong|12 years ago|reply
[+] [-] nahname|12 years ago|reply
Isn't it illegal to charge the customer before the goods are shipped. Do they handle pre-auth and settlement?
[+] [-] Ataub24|12 years ago|reply
[+] [-] lachyg|12 years ago|reply
[+] [-] Romoku|12 years ago|reply
[+] [-] TomGullen|12 years ago|reply
[+] [-] intelliot|12 years ago|reply
[+] [-] TomGullen|12 years ago|reply
[+] [-] wmf|12 years ago|reply
[+] [-] toomuchtodo|12 years ago|reply
[+] [-] EGreg|12 years ago|reply
You don't prepay?
[+] [-] Ataub24|12 years ago|reply
[+] [-] jruffer|12 years ago|reply
[+] [-] Ataub24|12 years ago|reply
[+] [-] ascordato|12 years ago|reply
[+] [-] artia|12 years ago|reply