Dwolla And the Demand for On-Demand ACH

It’s common for consumers who use a recurring service to designate a credit or debit card that the service provider can charge for amounts that may differ from month to month. With the automated clearing house, this is much less common.

Dwolla Inc. says that’s because it’s too difficult and time-consuming for most businesses to set up ACH bank transfers for regular payments of different amounts, so last month the Des Moines, Iowa-based company launched an application programming interface it says puts “on-demand” transfers on par with card-on-file transactions.

The new API, which can be branded by the service business, is aimed at usage-based providers like utility companies, advertising platforms, cloud-services vendors, and charities that might bill users on a regular basis.

Such businesses could request a credit card, but ACH transfers are dramatically cheaper to process. “Credit cards, even direct-debit cards, are just too expensive,” says Ben Milne, Dwolla’s chief executive. “Paying a $1 fee or a 60-cent fee is the kind of thing our customers are trying to get away from.”

Programming these transfers, though, is likely to tax most IT staffs. The ACH rulebook alone is more than 500 pages, while know-your-customer and anti-money-laundering regulations add to the complexity.

“Not everyone is going to be excited about on-demand bank transfers, but this is a notoriously difficult, time-consuming thing for [businesses] to set up, and we’re making it simple for them,” Milne says.

The most likely potential market this opens up for Dwolla amounted to some 890 million transactions in the third quarter last year, according to figures from NACHA, the rules-setting organization for the ACH. That number represents the volume of so-called prearranged payment and deposit transactions.

Some experts, though, are skeptical about how much of this volume the new API will capture. “Theoretically, that number is the possible market for Dwolla’s solution, but I expect the real possible market size is considerably smaller, perhaps 1% of that amount,” says Nancy Atkinson, a senior analyst at the Aite Group who follows the ACH, by email.

“I suppose it could be more, but most of the direct debits that are already processed today are automatic month over month,” she continues. “I think Dwolla will have more luck with new direct debits, rather than transitioning existing set-ups. It took decades for the NACHA volume to build, so I think it will start slowly and perhaps grow over time for the Dwolla solution.”

Through the API, end users need set up and authorize payment only once by selecting their bank, choosing an account, and entering their log-in credentials.

“We wanted to run multiple transactions with one authorization,” Milne says. This is done routinely with credit cards, but has been “expensive, time-consuming, and riddled with confusion” for ACH transfers, he adds.

Funds are transferred first to one of Dwolla’s partner banks—Veridian Credit Union or BBVA Compass Bank—and from there to the client’s bank.

Following a decision last year to do away with transaction fees and rely instead on billing for value-added services that come with its APIs, Dwolla is not charging businesses per-transaction. Instead, it’s levying monthly fees that depend on the range of services the client uses. These can range from $1,500 to $20,000, Milne says. He will not talk about any current users of the new API.

But while Dwolla has erased its transaction fees, clients could impose their own payment fees on end users. “What we charge our white-label clients for is to use our infrastructure and put their name on it, with opportunities to build custom features,” says Milne.

The new API isn’t the first from Dwolla that clients can brand, or “white-label,” themselves. The company released its first white-label API, a tool that lets companies or government agencies use the ACH for payouts to individuals, in September.

With the latest white-label API, Dwolla hopes it has addressed a larger potential market—businesses that sell usage-based services and want a streamlined way to collect payment. “Usage might be different every month, but there’s going to be a bill every month, and they need to be able to pull that money in every month,” says Milne.

—John Stewart