Building new infrastructure for digital payments may not sound sexy, but it’s an area that’s ripe for innovation. The legacy payments networks in existence today are bogged down with outdated technology, slowing progress. Des Moines-based Dwolla decided that the way to innovate in payments was to essentially blow up the outdated infrastructure entirely and start over by building out a new network from scratch. Today, that work has scored the company $16.5 million in new funding, in a Series C led by Andreessen Horowitz. The company’s previous investors, Village Ventures, Thrive Capital, and Union Square Ventures also participated in the round.
Dwolla is sometimes confused as an alternative to PayPal – and though it may compete with PayPal more directly on some initiatives, like MassPay which undercuts PayPal’s fees on a service business’ use in lieu of writing checks – that’s only a result of the new payments infrastructure the company has built, not the entire vision in and of itself.
Last year, for instance, Dwolla launched a number of new products that are helping propel the business to the next level, including not only its own mass payments service, but also FiSync, a real-time alternative to ACH payments, plus a partnership with the state of Iowa to process an initial $130 million in taxes, and a partnership with mobile banking and payments service provider mFoundry, which put the service in front of that company’s more than 800 bank and credit union partners interested in offering real-time, peer-to-peer payments to their own customers.
Today, Dwolla’s annual transaction processing run rate has topped a billion dollars; the company has grown at 15 percent month-over-month to reach a quarter-million account holders up from 80,000 in early 2012, and it has brought on more than 100 large customers, including both enterprise and government.
But getting to this point was not easy.
Explains CEO Ben Milne, the company found that some things it tried worked better than others. For example, trying to disrupt payments with a consumer-facing product has been tough.
“We found that retail is a really hard place to convert users in terms of getting them to pay with another payment form,” Milne admits. Along these lines, the company had launched various efforts both online and offline to encourage consumers to pay using Dwolla instead of traditional means like cash, checks or credit cards. While Dwolla’s efforts here continue today, they haven’t been the areas of growth which led to this new investment.
“A lot of the volume we’ve seen is in one-to-many relationships, and basically those are more check replacements than credit card or debit card payments,” says Milne. On this front, the company doesn’t have new relationships or partnerships to announce today, but hints that there are several in the works as the additional funding has been earmarked in particular to grow out the startup’s business development and relationship teams to service larger customers.
“These deals take a long time, and they require a lot of attention…they don’t work at the speed of small startup companies. They’re big, established companies,” Milne explains. “This round is about not screwing up the opportunity that we have. It doesn’t really matter if we were first to market with a lot of this new technology – it matters that we have the opportunity to be the first to market and the first to scale.”
The startup is now working with payroll companies and governments, among others — the latter initially in its home state, where Iowa Governor Terry Branstad announced in early 2013 that government officials would explore ways to use the service to collect property taxes, issue refunds, pay contractors, and renew vehicle registrations. But while Dwolla’s system works well for these large customers, it also works for smaller ones, too, including manufacturers who need to pay vendors, an ad agency paying consultants, or a micro-consulting platform paying thousands of people, for example.
“A16z makes bets on companies that change the underlying fabric of their markets and, like Facebook, Twitter, and GitHub, we think Dwolla is going to do it in the banking world,” said Scott Weiss, Partner at Andreessen Horowitz and new Dwolla board member, in a statement about the investment. “The fact that Dwolla’s network can simultaneously meet the needs of a complex enterprise or government, while allowing a parent to pay the babysitter with her phone, reflects just how simple and strikingly different this solution is in the marketplace.”
In addition to growing the engineering team, as well as those needed to support its larger customers, Dwolla is also expanding to its fifth office location, San Francisco, where it has already been interviewing and hiring ahead of the opening in June. (The company already has staff in Des Moines, New York, Omaha, and Kansas City.) In the Bay Area, the team will be led by Dwolla’s Chief Operating Officer, Charise Flynn, and will be mainly focused on product and business development and marketing.
Milne says that there is still much that needs to be done before Dwolla could really compete with a legacy payments provider. For instance, while its network supports payments now, a legacy provider like Visa supports two other types of transactions, as well: authorizations, which guarantee funds are there; and captures, which take the funds following an authorization. Over time, Dwolla will build up support for these types of transactions, which are still in demand in the market. The company will also update its mobile apps and do more to educate the marketplace, too.
But that “marketplace” may not mean consumers.
“The reality is that our fundamental business is allowing anybody with an Internet connection get access to their money and exchange it with anybody else they want to receive it,” Milne says. “A lot of that adoption is going to come instead from third-party platforms and products,” he adds. “I don’t see people going to Dwolla.com more and more – I see them doing that less and less, while our software is just facilitating the payments.”