Comment by pitdesi | Hacker News Reader

Comment by pitdesi | Hacker News Reader

This is interesting. I really like Dwolla as a company and the ambition, and think the are executing well, but there are some things you should know.

1) Most Americans use credit cards because they need the credit. That is something that won't be solved. Many of us also like the benefit of rewards (miles, dollars, whatever). To get payers on board, you need credit, rewards, and exclusivity (i.e. is this the only payment method available at somewhere where I want to shop). The last 2 meaningful companies were paypal and discover card. PayPal had millions of Ebay sellers using PayPal AND they initially paid people to become members. Discover card started the cashback movement and was the only electronic payment option at Sears (largest retailer in the world at the time).

2) Due to the Durbin amendment (which went into effect October 1st of this year), debit card cost to a FeeFighters merchant for the average transaction in the US is about $0.25. (http://feefighters.com/durbin). They now cost 22 cents plus 0.05% of the transaction. The reason that I mentioned a FeeFighters merchant is that most processors do NOT pass through the savings to the customer, you only get that with interchange-plus billing (which only about 10% of merchants are on, mostly big merchants).

3) Doing some quick math, that $350 million in transaction volume gets them to $175,000 in revenue per year ($350M/$500 transaction size)*$0.25 = $175,000.

Still, they have a fantastic opportunity and I for one am rooting for them. Ben has the same roots as FeeFighters (had another company, was pissed off at how much he was paying in processing fees). He chose to tackle it a different way, one that is probably harder to execute on but can make more change in the long-run. Having met him, I bet that he didn't quite say the words in that headline.

Credit cards right now are used by a lot of people because they're the best payment option. Easy to use, limited risk of loss to theft, many offer cash back or airline miles.

They can also be used as a source of payday/personal loans, but that strikes me as suboptimal. Justifying the existence of credit cards as a source of credit doesn't make sense. One, why must the credit be tied to a card? Two, how often is a responsible spender gonna need that card as a lender of last resort? In fact, the idea of a "charge card" predates the idea of attaching a revolving line of credit to one, and you can still get charge cards from American Express, among other firms.

The only argument in favor of credit cards is the freedom-oriented one that people should be free to have easy access to run up revolving debts. I'm fine with this argument, but let's not obscure the issue by pretending that a significant number of people actually need access to that credit and that they need it in card form. The utility of credit cards lies in making payments, not having credit, and they're clearly an inferior solution--the space is ripe for disruption.

"Check cards", or whatever name is used for bank cards that you can use as a credit card (instead of only with a PIN) are unequivocally a worse deal for consumers. You don't get any of the benefits (cash back/miles, insurance, etc) and in the case of fraud, the money is gone until the claim is processed. The physical form (card) is irrelevant, but it will be very hard for any system to compete with rewards credit cards. Since the card companies do not allow the merchants to pass on the fees to the consumer, unless you can make a system so pervasive that merchants can afford to _not_ accept credit cards, I don't see how you can compete on the basis of low fees. You have to give at least 1% back to the consumer (more to get people to switch), and then you have only removed a tiny bit from the status quo. The people who subsidize the rewards cards, those who carry a balance, probably aren't interested in a system that doesn't offer credit.

Yeah, this was my thought too. Since everyone else who uses a credit card pay no fee, and I have to pay 25c to Dwolla, I'm actually subsidizing everyone else's credit card fees.

If the credit card fees were passed through to the customer it would work, but with the current "socialized" model there is no customer incentive.

Credit card fees are passed on to the customer. They are included in the price of everything you pay. The merchant is the one saving money with Dwolla, and hopefully passing on the savings to you.

Except that the CC companies forbid merchants from passing the extra costs on to CC users.

Yes, in the sense that they can't charge customers paying with a credit card a different price. However, because payment fees are an expense to their business, merchants absolutely pass on that cost to customers - it is reflected in the final price of whatever they are selling. In a sense, the non-credit paying customers subsidize those paying with a credit card.

Of course they/we do. But, the Nash equilibrium is at 100% credit card use: if I stop using credit cards at vendors, I lose out on the benefits (interest-free loan, chargeback ability, rewards, purchase tracking through Mint), in return for a savings of 1 - N/(N-1) * transaction fee = zero. I have an incentive to keep using charge cards.

But merchants are allowed to give customers a discount for paying "cash" (actual cash or debit as the debit fee can often be passed onto the customer).

I agree with this 100%--debit cards and check cards are a bad deal for consumers, compared to credit cards, and I only use mine at an ATM I trust.

I want to make this comment just so people reading these posts aren't confused--charge cards, which I talk about in the above post, aren't the same as debit cards; charge cards are much closer to a credit card that you have to pay every month. These are a great option for people who want to avoid revolving credit and can afford the annual fee most of them charge (but they come with perks). Anyway the charge card demonstrates it's possible to do easy electronic payments, in a way safe for consumers, without tying them to credit.

Check cards issued by banks today, with the Visa and MasterCard logos, are fully equivalent to credit cards minus the line of credit. When used as credit (anywhere Visa/MC is accepted) they offer reward programs, fraudulent payments are refunded the same day, etc.

In 2002, my MasterCard check card was stolen and my bank account was cleaned out by the time I got down from my climb and discovered the theft. It took three weeks (including closing my original bank account and reopening with a different account number) before the money had been refunded. This was inconvenient considering that I had just started a year of exchange in Canada. Unless the rewards/benefits/insurance is _better_ than a credit card, it still doesn't seem like a wise choice.

The parent comment was actually talking about charge cards, not check cards. Those predate debit cards and credit cards. With those, you agree to pay your bill in full every month, so they are not tied to a line of revolving credit like a credit card, nor do they directly debit from a bank account like a debit card.

They are rare these days as they usually charge a significant annual fee. This is probably since there are no over-limit fees nor usurious interest rates (unlike a credit card).

You wanna know what debit cards don't do that credit cards do? Help me build a credit history and a good credit score in preparation for buying a car and/or house. In absence of credit cards (ergo credit history), the only way to buy a new car or house (for the first time) is Cash or Co-signer.

If you already have a credit history because you already bought a car or a house, good for you, but how did you get there?

Google: manual underwriting

so I'm told.

Isn't the US weird? Over here you just need to prove you will be able to afford the loan (paychecks or whatever). It's against the law to discriminate based on past financial history (though car dealers do it all the time).

See to me, that is strange. I don't call that discrimination, I call it risk management.

Good risk management requires discrimination. And no, there isn't anything morally wrong with "discrimination".

I used to think the only argument in favors of credit cards is that they offer credit.

However, from a purely selfish perspective, they also reward people who pay on time - if you play the "rewards" game, which I have avoided throughout most of my adult life. I regret that now. The rewards are pretty substantial and based on my math they almost make up for the transaction fees (I would say you can get 2% cash back - which offsets most of the 3% the card company takes).

The question is will merchants offer discounts for dwolla? I doubt it. Instead Dwolla will have to offer cash back or other rewards to customers. Given their financials as described in this article, I don't see why they couldn't succeed. Clearly their model works better for merchants. Does it work better for consumers? Only if they offer rewards, which would cut into their attractiveness for merchants. Still with a flat $0.25 they could gain serious traction with large item merchants.

I am hoping the likely outcome of this is a further weakening of the conventional financial industry.

It will be fun to watch. I wish them the best of luck.

Not just rewards, having a credit card with a good history is so valuable. I've just turned 20 and my credit rating is the highest possible because of how I've used credit cards (and other sorts of credit) in the past, they are a fantastic way to prove you're a good person to give credit to.

They don't really offset the fees because the fees are higher! At least in Canada, the high points cards actually cost more for merchants to accept. Merchants are charged different fees per card but by the rules of the credit card companies are not allowed to refuse the high cost, high point cards.

The Competition Bureau (federal government agency in Canada) is currently battling the credit card companies on this point: http://www.cbc.ca/news/story/2010/12/15/con-credit-card-fees...

Yes, really the optimal plan is to use an Amex that has higher rewards due to its higher merchant fees. Yes, the fees get passed on to the customers, but they get passed on to ALL the customers, so the people using Visa or MasterCard or cash are subsidizing my Amex fees. Not particularly nice, but optimal!

I think it will be a slow process but they will certainly succeed as a business. The rent payment use case alone should be enough to keep the company afloat indefinitely. Rental companies can very easily say we only accept cheques every month or if you want automatic payments then dwolla, no credit cards.

The real reason I wouldn't use dwolla for a consumer web transaction over my credit card is not the credit aspect but the risk aspect. With a credit card I'm protected against fraud fairly well whereas with debit or dwolla the protection isn't nearly as good.

Here is who gets paid by debit from my bank accounts: my employees, my lawyer, ATM cash withdrawals, and my credit cards.

No damn way I'm giving random vendors permission to ding my bank account. Credit cards are about cash flow safety & billing safety. Debits from a bank account are no substitution for this. Would you use a debit card at a strip club?

I have. But banking here in NZ is different.

Regarding #1, I found these statistics from: http://www.creditcards.com/credit-card-news/credit-card-indu...

Approximately 74.9 percent of the U.S. families surveyed in 2004 had credit cards, and 58 percent of those families carried a balance. In 2001, 76.2 percent of families had credit cards, and 55 percent of those families carried a balance.

So, assuming the balance hasn't shifted too drastically, it's true that the majority of Americans need (or at least find convenient) the credit. But there's also clearly plenty of people who don't; 15 to 20 percent of Americans is a pretty big market.

Actually, these numbers mean that LESS than 50% of families cary a CC balance (58% of 74.9%)

    To get payers on board, you need credit, rewards, and exclusivity

That's like telling Apple of 1997 that to get consumers on board, they needed faster processors, lots of software and open hardware. Common sense doesn't led to innovation.

I think the ease of using them for accounting is one of the major reason. If you have no way of ensuring the transaction is done, it would be pretty hard on automation of accounting.

Like so, this service provides an API for that matter. At least most banks are reluctant to provide APIs for accessing the statement, not talking about instant statement already.

Its weird how they did the math here, they said 30-60M/Month or 350M/yr, that math is busted, is 360M on the low end and 600M on the high end. Which puts them at $360M/$500 transaction size)$0.25 = $180,000 or on the high end, $600M/$500 transaction size)$0.25 = $300,000

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