M-payment services- they are emerging left, right and
centre. One of the newest is Dwolla, a location-based service that
offers a payments application that does not require merchants to
invest in additional hardware. But how viable is the model? Duygu
Tavan investigates

 

Mobile payment services are considered by many
to be the future, but this market is still in its infancy and
companies are still in the process of carving out niches for
themselves. Eventually, analysts say, the market will consolidate –
probably within the next decade – and those niche players will
merge or be bought up or acquire other players. Until then, many
start-ups will emerge.  Since mid-August alone, we have
reported on
RushCard,
Verizon and Intuit’s partnership, Dutch company

Tinypay
and Sweden-based
iZettle
(see box outs). Then there is of course Isis
and Google Wallet.

Now Dwolla, an online, social, mobile and location-based
payments platform, has developed a new service  called Proxi
that does not require users to invest in addition hardware.

Dwolla’s service is called Proxi and enables
those who sign up to it online to exchange funds with people and
merchants in their proximity without the need for cash, cards or
near-field communication (NFC). Users broadcast their location to
other Proxi users within a specified radius for a specified amount
of time meaning potential customers are provided with a real-time
list of nearby Dwolla-accepting merchants.

All these payments services and product providers differ from
each other slightly not just in the niche they cover, but also in
the way they operate their payments system. Some operate an open
loop system (Visa, MasterCard and their partnerships, for
instance), others closed loop systems – and there are pros and cons
for both models.

How well do you really know your competitors?

Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.

Company Profile – free sample

Thank you!

Your download email will arrive shortly

Not ready to buy yet? Download a free sample

We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form

By GlobalData
Visit our Privacy Policy for more information about our services, how we may use, process and share your personal data, including information of your rights in respect of your personal data and how you can unsubscribe from future marketing communications. Our services are intended for corporate subscribers and you warrant that the email address submitted is your corporate email address.

 

Payments by proximity

Dwolla is a closed loop system in which the
company is the issuer, manager of the network and provider of the
merchant card acceptance service. Dwolla’s system is based on
application programming interface (API) which is a set of software
programmes can follow in order to communicate.

The company launched in December last year and
in the past seven to eight months, its daily transaction volume has
soared from $50,000 per week to $1m a day. The company has 40,000
users so far. For consumers, its biggest attraction is the cheap
money transfer fee: $0.25 per transaction. The limit for individual
consumers is $5,000 per day, for merchants, who make up 10% of the
company’s customer base, it is $10,000.

The proposition may be innovative, the future
of electronic payments lies in open loop systems operated by
networks such as MasterCard and Visa simply because they have the
distribution scale, analysts argue.

 

Verizon

No need for additional hardware

Dwolla positions itself in the payments market
as a software provider whose system does not require users to
invest in additional hardware, such as a barcode or NFC
reader.  For Ben Milne, the founder and CEO of Dwolla, the
proposition is focused on how to allow the system to recognise that
a payment has been made without the typing, swiping or scanning. “I
think it’s safe to say that we operate outside traditional
payments, but I’d hate to pigeonhole us as a closed system period,”
he says.

“From a company design perspective, we are
like Visa. Our network is cash based. We operate as a software
provider. Our vision is to be a cash-based network that does not
require the use of credit or debit rails,” he says.  So Milne
sees Dwolla offering a software solution to mobile payments’
current hardware problem. The system’s currently undergoing beta
testing on the Apple iOS, with plans to launch the beta test
version via the App Store in September.

 “Through the use of API, we can build
addtional functionality into the existing sale system. So it
is a software upgrade, instead of a hardware investment,”
explains Milne. “The future of payments is API driven and I don’t
think that’s something the payment network industry has wrapped
their head around yet,” says Milne.

 

 

Closed loop vs open loop

There is the inevitable doubt and worry about
the level of risk, of course. But Milne says that because no
financial or personal information is actually stored on the phone,
the level of risk is lower than with more established services
because whoever steals your phone would need your email address,
password and PIN to log on to your Dwolla account, he says. Dwolla,
like many other peers, is in its infancy, but Milne says the
company has not seen a major growth yet. “We’ve seen some early
stage validation, which has set the stage for us to release
products and services.”

Rick Oglesby, senior analyst at Aite Group,
who focuses on merchant acquiring and commercial card issuing, says
that while Dwolla has an innovative proposition, its closed loop
system may somewhat work to its disadvantage one day.

“We believe that mobile wallet success will be
significantly about distribution success, so leveraging consumer
banking, mobile device and merchant acquiring diizettlestribution channels is a
great way for a mobile payments player to position themselves for
success,” he says.

“Embracing open loop payment networks such as
Visa and MasterCard is one way to enable this, allowing them to
take advantage of the capabilities, merchant and consumer base
already in place. As a start-up, a closed-loop provider is not
currently leveraging these advantages, so will have some
disadvantages in competing against the larger players who have
embraced open loop solutions.”

But Milne does not sound keen to open up his
scheme to larger networks. “By opening our network to third party
innovation, we are, in a sense, opening our network in a way the
analyst maybe never thought about. Our goal is, and always will be,
to move money as cheaply as possible, but taking on other networks
means taking on their fees.”

 

Closed loop = disadvantage

As the mobile payments market is still
evolving, there is inevitably be some mergers and acquisitions.

“Isis and Visa have already announced their
intention to do this, PayPal and Serve do it already and we expect
Google Wallet will in the future also. Dwolla is currently
operating somewhat counter to this. Simultaneously on the merchant
side, the merchant acquiring industry provides a large distribution
channel that can (and does) sell multiple payment acceptance
capabilities to merchants all at the same time,” Oglesby says.

Dwolla may be driving innovation in the mobile
payments space, but in the long run, competition will be so fierce
that operating a closed loop system can be restrictive.