Open banking as a concept seems straightforward enough, but when you get into the details, that’s where things grow complicated. This is especially so in the rapidly evolving payments arena.
Dwolla, a fintech providing account-to-account payment solutions, is a good example. CEO Brady Harris admits his friends and family have no idea what Dwolla does other than it’s “something to do with banking.” He explains that Dwolla is a key part of the open banking triangle, as he illustrates it. Financial institutions occupy one side, data-sharing firms like Plaid and MX are on another, and firms like Dwolla complete the figure.
Dwolla has a strong concentration in serving platform companies that cater to either businesses or consumers. Three quarters of Dwolla’s volume is B2B and the remainder is B2C. Examples of such platform companies range widely, including FleetCor, which provide truck fleet fuel cards and related services; Groundfloor, offering fractional investment in real estate; Metromile, which sells by-the-mile car insurance; Rally Rd., which allows people to invest in shares in rare classic cars; TenantCloud, a property management platform that enables online rent payments; and Goat, a rare shoe marketplace.
How Will Your Institution Fit the Future?
The deals Dwolla strikes underscore the importance for traditional financial institutions that want to thrive in payments to figure out the role they can best play — and then seek out partnerships to produce more than the sum of the parts.
“Financial institutions hold the money, having gone through the regulatory hurdles, and are licensed to move funds on the various networks,” says Harris in an interview with The Financial Brand. “The Plaids and MXs verify user IDs and transactions and we provide the actual account-to-account payments. We’re not a bank, but a partner that benefits everybody.”
Dwolla became one of the first companies to facilitate real time payments on the RTP Network operated by The Clearinghouse, working in partnership with Cross River Bank. The company’s setup permits funds to be moved instantly, around the clock, seven days a week, and went live in April 2021.
Dwolla also offers fast ACH payments, in conjunction with Veridian Credit Union and Evolve Bank & Trust, and push-to-debit payment services through MetaBank, N.A. Financial institution partners hold prepaid balances that are left in the Dwolla system to facilitate payments. This is called the “Dwolla Balance,” somewhat akin to the balances consumers can leave in their Venmo accounts.
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Surfing Continuous Waves of Change in Payments
More such partnerships will be coming, says Harris, as additional use cases for speedier payments arise and more financial institutions realize that they must get aboard the open banking trend, rather than seeing companies like Dwolla as competitors.
Harris sees 2022 and beyond as a time for Dwolla to advance its own version of what he likes to call the “Tesla effect.” By this he is referring to the auto company’s early efforts to make a case for electric cars before many consumers were ready for them.
“I’m not saying that I’m Elon Musk nor am I saying that we’re Tesla. But we got to market really quickly with a real-time payments product, and now we’re sitting down with clients and potential clients, and educating them from the ground up on exactly what RTP is and how it would benefit their businesses.”
— Brady Harris, Dwolla
Such payments proselytizing comes at a time when the business is in a state of constant flux. Harris believes that within five years the speed and relatively low cost of newer payment rails will eclipse traditional channels. Amazon’s decision to allow use of Venmo on its site and its announced decision to stop accepting Visa in the U.K. — with some surmising that it may try that in the U.S. as well — serve as symptoms of what could be coming, says Harris.
“It’s fascinating to watch the free market on full display versus the Visa and Mastercard monopolies,” says Harris. “People are going to start to box them out and look for alternative payment rails.”
Why Faster Payments Have Wide Appeal that May Grow with Inflation
Harris is a payments veteran and joined Dwolla in April 2020. He notes that Dwolla, which originated as a consumer payments platform before reinventing itself, has long been involved in faster-payments efforts, including not only The Clearinghouse RTP program but also the Federal Reserve’s Faster Payments Task Force and the Mojaloop payments project overseen by the Bill and Melinda Gates Foundation.
While much of the company’s activity has been driven by demand from companies for faster payments, Harris sees that demand being stoked in part by consumers.
“People want their money faster,” says Harris. A growing portion of the economy is in gig work, contract jobs and freelancing.
“Those people are very sensitive to the timing of their payments, so we’re seeing many of the platforms that employ them coming to Dwolla to integrate with our API to make those payments,” says Harris.
“RTP will be the winner hands down, because you can process those payments for pennies on the dollar compared to a credit card transaction,” he explains. “And these payments settle faster than card payments can.”
A New Wild Card Faces Payments:
Something new facing fintechs of all stripes, but especially payments specialists, is the specter of inflation.
Harris says it’s possible that people will be attracted to faster payments channels as they want to be paid faster or need to receive funds quickly so they can turn around and order inventory expeditiously.
“Managing inventory, costs and logistics are all highly dependent on the speed of capital,” says Harris, “and RTP sits squarely on that.”
How much of a tidal force inflation turns out to be on payments remains to be seen, but Dwolla has already seen its share of change wrought by current events, during the height of Covid-19 lockdowns.
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How Dwolla’s Covid Dip Turned into a Hockey Stick
Harris arrived at Dwolla just as much of America was going into shutdown mode. Gross payments volume, a key metric the company watches, fell through the floor.
“I’m talking that it dropped 40% overnight,” says Harris. Many of the companies that Dwolla serves are young platform operators who are only in the early stages of seed funding and are still “burning cash.”
“We saw a handful of what otherwise would have been really viable, exciting companies using our platform go out of business,” Harris recalls. Even some well-known names who were clients were fighting to survive as business fell off for months.
“But as we were getting into the third quarter of 2020, our payment volume began to recover,” says Harris. “And then it just hockey-sticked, exceeding pre-pandemic levels.” Dwolla ended 2020 at $20 billion in gross payment volume, above original projections, and Harris expects to finish 2021 at nearly $40 billion.
Harris credits much of this growth to a general “sprint towards the digitization of payments,” prompted by the desire for contactless payments and ecommerce.
“So in a weird, twisted kind of way Covid was good for our business, because we were positioned with a product that benefited from this evolution,” says Harris.
An undefinable risk, right now, is among the young companies that Dwolla typically partners with. As startups with few assets and a wealth of ideas, many of these young fintechs rely on venture capitalists and private equity investors. Harris explains that if inflation persists and becomes a more significant factor, those investment sources may dry up, meaning fewer platform and app partners for Dwolla.
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Foreign Exchange and a Payments Role for Crypto
The next big project for Dwolla will be the first-half 2022 introduction of foreign exchange transactions via RTP, ACH and push-to-debit. “Our clients will be able to send funds internationally using Dwolla networks,” explains Harris.
While this will be a major step for Dwolla, which has operated strictly in the U.S. to date, Harris says something that may factor into this in the future will be cryptocurrency. He believes this would make an efficient marriage of purpose and structure.
“I believe international transactions, even over existing networks, will either be complemented by or replaced by crypto payment rails,” says Harris.
Harris believes that cryptocurrency is “the ultimate payment rail for cross-border payments.” Crypto movement could occur faster and at lower costs than traditional currencies, in part because it doesn’t have the regulatory hurdles that existing processes must include.
That’s a bit down the road, though roads seem shorter than ever today. The FX effort initially will involve disbursements only, so Dwolla’s partners — one mentioned is Goldman Sachs — will still be domestic financial institutions dealing in “regular” money.