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Dwolla Aims To Speed Real-Time Payments with Alliance Data Deal for Cardless Credit

In its latest gambit to commercialize instant payment settlement, Dwolla Inc. on Tuesday unveiled a service that will let users pay online merchants using credit rather than their own money.

The service, which the Des Moines, Iowa-based alternative-payment processor is calling simply “Credit,” is intended to accelerate progress toward faster payment transfers, a long-time goal at Dwolla. “The [Dwolla] member gets instant buying power, and the recipient gets instant access to funds,” Ben Milne, founder and chief executive of the 5-year-old company, tells Digital Transactions News. “This deal will inject billions of dollars of buying power into the Dwolla network.”

The new service will also let merchants accept what are essentially cardless credit card payments without paying interchange fees. Dwolla’s usual fee structure—no fees on transactions up to $10, and 25 cents per transactions beyond $10—will apply. That contrasts sharply with typical interchange of 2% or more on transactions for small, card-not-present merchants. “We do see [the pricing] as revolutionary,” says Brian Billingsley, director of strategic business development at Alliance Data Systems Corp., the Plano, Texas-based company whose Retail Services unit will own and fund the receivables. Retail Services manages more than 120 cobranded and private-label card programs.

Milne says Credit is starting out in beta and will be phased in with users in stages to help control credit risk. And, while users can currently tap their Dwolla accounts to pay each other as well as online sellers, only online merchants will be eligible to receive Credit payments to begin with. “I do see person-to-person [payments] being made available long-term,” Milne says.

Dwolla is tightlipped about its user and merchant counts. Milne says more than 20,000 merchants now accept payments through the system. The last figure it gave for consumer account holders was just over 250,000, a number Milne says has now been exceeded “significantly.” About 40 online sellers have been accepted for the Credit beta.

Alliance Data will wholly own the receivables and manage the program much as a financial institution would manage a credit card account. This contrasts with the company’s arrangement with the Bill Me Later spot credit service owned by eBay Inc., announced in August, in which Alliance Data co-owns the receivables with the partner.  The only cost to Dwolla users will be finance charges if they tap the credit and revolve. “We wanted to make the product with as few moving parts as possible,” says Billingsley.

With the new service, user and then merchant accounts can be immediately credited, making instant funding of user accounts more widely available than has been possible so far with the existing debit system, says Milne.

Frustrated with the two days or more it could take for funds to flow through the automated clearing house network from users’ bank accounts to their Dwolla accounts, Dwolla last year introduced FiSync, a tool that lets financial institutions link to Dwolla to verify funds availability and move money in real time. But the rollout of FiSync has been slow. So far it has been deployed, at least in part, by 12 financial institutions, Milne says. The only one Dwolla has been willing to name is Veridian Credit Union, Waterloo, Iowa, one of Dwolla’s backers.

With the need to get banks to integrate with FiSync individually, “only a percentage [of users] would get instant access” to their money over time, Milne says. Now, with Credit, that process can move much faster and involve far more users, he says.

This is not the first time Dwolla has tried a credit-like service. In December 2011, it introduced a product, called Instant, that granted credit up to $500 on the spot for impulse purchases.The service carried a $5 monthly fee, payable whether the user tapped the credit or not. Milne says Instant hasn’t appealed to Dwolla users. “We discovered consumers wanted a more traditional credit card relationship, where they pay only if they actively borrow,” he says.

If Credit catches on, it could have a dramatic impact on credit card acceptance pricing, long a sore point with both physical and online merchants, notes Steve Mott, principal at Stamford, Conn.-based consultancy BetterBuyDesign. Two years ago, the Durbin Amendment dramatically chopped debit card interchange. Now, with Alliance Data’s backing, Dwolla’s Credit service could “create the same downdraft on credit [pricing] that Durbin did for debit,” Mott says. “It sets the stage for a business model that’s not dependent on transaction fees for credit cards.”

Indeed, the deal announced on Tuesday is “just one more interesting step where the cutting edge of innovation is turning the scissors on credit card interchange,” says Mott.

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