Give Dwolla Credit, But It’s Tough To Break A Habit

By Jeffrey Green (@epaymentsguy)

Imagine a merchant paying just 25 cents for a Visa credit transaction, regardless of the sale amount. Seems implausible, but pressure is growing on the bankcard networks and processors to reduce their credit card rates. And this time it’s not coming from merchants or the U.S. government.

Alternative-payment startups are upping the ante with legacy-player partnerships designed to help merchants reduce how much they pay when taking purchases on credit. Not surprisingly, Dwolla, the Iowa-based digital-payments network that charges participating merchants just 25 cents for an automated clearinghouse (ACH) debit transaction, has its thumb on the scale. It’s now offering a similar rate for immediately settled credit transactions. And just as Dwolla does with ACH-based purchases, it will charge merchants nothing when the credit transaction is $10 or less.

However, despite the obvious benefits to merchants, efforts such as those Dwolla and others are undertaking to turn card-acceptance pricing on its head, including LevelUp’s zero-interchange program where merchants instead pay the processor 40 percent of whatever it brings in through rewards redemptions, face considerable difficulty gaining momentum. Consumers historically resist changing what they’re used to doing at checkout. And when that happens, merchants forego embracing the change.

Indeed, unless Dwolla and Alliance Data can provide sufficient consumer incentive to alter their habits, merchant support of the payment option likely will lag, as has been the case with many other alternative payment options deemed better than those supported by legacy-based systems, including LevelUp, not to mention Dwolla’s mobile-based ACH debit initiative. Look how long it took PayPal to become a successful online payment option, and it’s only now working its way into the brick-and-mortar world. Its pricing at 2.9 percent of the sale plus 30 cents is hardly a discount. In fact, it’s significantly higher than most bankcard discount rates.

So there’s a bit of intrigue in merchants paying just 25 cents for a credit transaction, and it doesn’t even involve a card. How could its supporters possibly afford to run such an operation? The underwriting itself seems undoable. It’s a pretty safe bet that only the very creditworthy will be chosen to participate. But why would they give up using traditional credit cards, many of which already provide them significant perks?

Dwolla last month announced a multi-year partnership deal with Alliance Data Retail Services to offer Dwolla Credit in conjunction with Alliance Data’s banking subsidiary Comenity Bank. Through the partnership, Alliance Data will offer a “cardless” private-label credit product for the Dwolla network.

The companies are in beta testing of the credit product, which initially will involve approved Dwolla members who will be tasked to critique and come up with ways to create experiences designed for today’s “always on” shopper. Dwolla also has created an online Storefront, whose 40 inaugural handpicked Dwolla retail merchants and services will accept Dwolla Credit. Merchants and organizations on the site include fiverr, Zady, pond5, 9th&Elm and Angelwish.org.

When shopping, the merchants will provide Dwolla Credit as a payment option in their checkout page dropdown menus. Dwolla tells PYMNTS.com that it has “a handful” of merchants that will be accepting Dwolla Credit in stores, but “they’re waiting on the mobile availability,” which will similarly involve a dropdown menu to enable shoppers to choose the new Dwolla Credit payment option. Ultimately, Dwolla hopes to build new relationships with financial institutions from the Dwolla Credit initiative.

Dwolla won’t give actual totals for merchant and consumer participation in its overall network, just what it had at the end of 2012, when it reported having 25,000 merchants and organizations plus 250,000 users. It says it’s on a trajectory to process $1 billion in transactions this year.

It’s safe to say Dwolla, which has been creative in its efforts to disrupt the payments market, is moving slowly in building its network. Whether that’s by choice or lack of market interest is hard to say, especially given how little information Dwolla shares publically about its operations.

Dwolla apparently believes it can make money offering either ACH or credit transactions at 25 cents. And Alliance Data at least wants to test whether it can make money through a cardless credit product processed over the Dwolla network. A representative from Alliance Data was not immediately available to say how much it would charge Dwolla Credit users in interest on unpaid balances, what credit limits would be in place and what loyalty/rewards might be included to help spur interest.

Given that Alliance Data’s agreement is for multiple years, it seems likely both parties will try multiple means to encourage consumer and merchant adoption. Changing consumer behavior, in particular, is no easy task. But, based on some recent new product successes, the multi-pronged approach likely will, or must, involve:

Solving a particular consumer payment problem

Offering sufficient incentives through discounts, rewards and other techniques to motivate consumers to want to try something different

Providing widespread marketing to let people know the service is available and that demonstrates clearly why they should want to change to using Dwolla Credit

Making the process fun.

Without achieving each of these objectives, it’s doubtful the partnership will succeed. Still, legacy networks must adapt. Eventually one of these alternative-payment initiatives will catch on, and then they’ll feel it.