With instant-everything now a given, why do bank transfers still take three to five days? Surely our banking systems operate in real-time when we make a purchase using a debit card. So why should we wait as long as a week to get confirmation of a deposit that simply moves from one bank to another?
It isn’t that the technology to process transactions immediately isn’t available. But the entrenched method for moving money between banks is based on the ACH (automated clearing house) system that was developed 40-plus years ago and processes transactions in batches, rather than individually. The various credit card networks sit atop the ACH network, leveraging its transfer mechanisms and charging merchants varying percentages (as much as 3 percent) of the sales amount to process the transactions.
Of course, none of this is particularly newsworthy, and prices were adjusted long ago to compensate for the various charges. But this is exactly the kind of status quo that is open to disruption when a radical change comes along. And the upstart payment processor Dwolla Corp. may just start the landslide.
Dwolla has already been disrupting payment systems such as PayPal. It charges a flat fee of 25 cents per transaction (and transactions under $10 are free). PayPal’s credit card model charges 2.9 percent of the sale price plus 30 cents per transaction (with some variations based on the type of account being used).
So far, Dwolla has found a happy following for two reasons. The first is the obvious difference in charges per transaction. For any companies (or even individuals) receiving significant amounts of payments, the net result can be well worth using Dwolla over PayPal. But the second benefit may even trump the difference in rates for some. Dwolla has released an API that banks, credit unions, and businesses can use to tap directly into Dwolla’s transfer mechanisms and initiate real-time transfers. This means merchants can benefit from Dwolla’s ACH networking, instead of the slower transfers used by older bank and credit card systems.
The differences here are the reduced fees (ACH fees are typically $12 per transaction) and reduced time. Combine them with a flat fee structure, and you have a compelling reason for businesses to jump on this system.
Though merchants can benefit right now from Dwolla’s lower rates, the downside is that banks and credit card companies must adopt the Dwolla API in order to achieve the real-time processing. Banks may not have any incentive beyond a marketing spin they might be able to leverage by touting their real-time transfer abilities. Still, if enough large merchants exert pressure on their banking institutions to make the technology shift, things could move rapidly.
— Scott Koegler was a CIO for 15 years and has been writing about technology for the last 18 years. He is editor of www.ec-bp.org, a newsletter that addresses supply chain technologies, and manages other newsletters at www.YourCompanyNewsletter.com. You can contact him at scott@koegler.net.
I'm a satisfied Dwolla customer. With banks, I ... while I recognize they have a tough job, they sure do a lot to alienate me as an individual. As much as I welcome Dwolla's low, low fees, even more important to me as a consumer are: its swift and predictable action; automated documentation (transactions generate useful e-mail); and general impression of good service.
It's hard to get security right, and it's almost equally hard to judge when it is right. Dwolla sure appears to have the basics in place, including this nice FAQ on its actors and security.
Ah, the memories. I'm reminded of SWIFT, the old international wire transfer service, which despite its name was anything but. Of course, in those halcyon days (the early 80s), the use of a 300-baud modem and one-way routing practically guaranteed slowness. We marveled not at its speed, but that it worked at all. Nowadays, we have all these new-fangled payment services like, say, FEDChex, which are based on the ACH systems, but Dwolla looks good to put paid to these last-century systems. Like SWIFT before it, the ACH will continue to be used extensively as long as there is no compelling reason to leave it. Of course, a sizable savings to users and clients will put some solid economic pressure on the old guard. I'm looking forward to watching the fun.
Well, I don't think Dwolla is going far if it needs banks to accept them... it basically takes away some revenue. They should find a way to get into the system without they noticing it, or to provide a benefit for banks.
Cool, thanks for your response Scott. Consumer demand is necessary to drive any new initiative forward. I wonder if Dwolla is on the scene a bit too soon to make enough of a splash. We'll see!
I'm certain that securit is top of mind in an of these kinds of systems. I do know that Dwolla doesn't transmit any account information (unlike credit card processors) it's all behind their own systems, so that eliminates any particular vendors' customer lists being hacked as a security issue. Banks deal with ACH, which as I point out earlier, has much less stringent security.
Perhaps banks have similar concerns about security, which could hold up the adoption of solutions like Dwolla. I wonder whether partnership or even acquisition by a larger IT supplier would help the situation.
Michael - not just speed, but also overall cost. What security issues have you found to be getting in the way? Personally the current ACH system scares me because those who have the ability to fund your bank account also have the ability to extract directly from your account. That said, incidents of this kind of activity are extremely low while volume is tremendous. What's different?
Hi Nicole - As I understand it, FISYNC (the Dwolla API) is in use with a few credit unions, but has yet to be connected to any banks. I understand that there are some retailers using the service, but I don't have specifics on numbers.
I use it as an alternative to Paypal for paying contractors who do work for me. It's considerably less expensive and faster, particularly for them - making them happier to work for me when there are conflicts in scheduling.
As for when banks will get onboard, I expect user demand could be the driving force for that kind of change. If interested parties petition (complain) their banks, some interest may grow. I also understand that Dwolla is making some headway in at least a couple larger banks.
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