When he was a merchant selling stereo speakers online, nothing burned up Ben Milne more than the fees he had to pay credit card companies. So he has started a company, one that aims to create an alternative, Internet-based payment system with a simpler fee structure for both consumers and retailers.

The company, based in Des Moines, Iowa, has a funny name: Dwolla. Nevertheless, Mr. Milne, Dwolla’s chief executive, says the system has about 70,000 users (including about 5,000 merchants) and is handling $1 million a day in transactions.

How does it work? Users sign up online for a Dwolla account, which involves entering personal information like date of birth and Social Security number. Dwolla says it uses the information to make sure you are old enough to open an account (you must be 18 or older) and to verify your identity.

Then you fund the Dwolla account by linking it to a bank account and transferring money to Dwolla (this differs from other kinds of newfangled payment services — like, say, Google Wallet — which are typically funded with a credit card).

Formalizing the setup can take a couple of days. During that time, Dwolla makes one or two small test deposits, which you must verify, to make sure you are authorized to have access to the bank account. Dwolla itself is not a bank, so once the Dwolla account is funded, the money actually sits in a credit union in Iowa.

Then, when you shop at a merchant that accepts Dwolla (a map is on the Web site), you can get access to the system via a phone; find the merchant, enter an amount and click to pay. You can also pay individuals, via an e-mail, or by Twitter or Facebook; the recipient gets notification that you have sent the money. (Dwolla says it does not exchange your financial information with the social media sites “in any way, shape or form.”) Then, he or she must register for an account at Dwolla to accept the money.

Transactions are now free for amounts under $10; otherwise, they are a flat 25 cents each, rather than a percentage of the transaction. The store — or the person getting the money — pays the fee, under Dwolla’s default setting. But you can click an option to pay the fee yourself — if, say, you’re making a donation, or paying back a friend who fronted you some cash at dinner.

The system is secure, Dwolla says, because the merchant never sees your bank account number; the transaction is handled by Dwolla. “We don’t expose your information,” Mr. Milne said.

To demonstrate how this actually works, Dwolla sent me a test payment of $1. I received an e-mail, notifying me that I had been sent money on Dwolla. (It also said, “It could be a million dollars!” Cute — maybe a bit too cute, for a payment system trying to be taken seriously and not wanting to be mistaken for spam or a scam.)

To accept the payment, I clicked on an embedded link and was directed to the Dwolla Web site, where I selected a PIN and signed up for an account. (I didn’t, however, link my bank account; call me a fuddy-duddy, but I tend to be cautious about doing things like that.) Mr. Milne says Dwolla is vigilant about watching for phishing attacks, which often involve sending look-alike e-mails with embedded links. But if you are uncomfortable clicking on a link in an e-mail, he said, you can instead go directly to Dwolla’s Web site by typing its URL yourself, then entering your e-mail address to receive your money.

At that point, the money could sit there in my Dwolla account, to be used to pay other Dwolla users. Or — if I linked my bank account — I could transfer the buck into my outside account. Since this was just a test, I opted to pay Dwolla back its dollar. (But I didn’t click the option to pay the quarter fee myself; sorry Dwolla!)

One catch is that moving money from your bank to your Dwolla account typically takes a few days because of the funds transfer system that banks use. That’s a drawback if you are suddenly in need of cash to buy something unexpected and your Dwolla balance is too low.

So to speed up access to your money, Dwolla recently began offering an “instant” option for people who want faster access to their cash. The option, which costs $3 a month for unlimited use, means Dwolla will spot you up to $500 when you do not have enough in your Dwolla account to cover a purchase. You promise to repay the funds within 30 days; otherwise, you incur a flat, $5 late fee. (Dwolla currently does not require a formal credit check for Instant users, but may in the future, a spokesman, Jordan Lampe, said in an e-mail. Right now it qualifies Instant users with a risk analysis tool developed with the Members Group, a payment company and a Dwolla investor.)

Adding fees to accounts is not wildly popular with consumers right now (see: Bank of America). But Mr. Milne counters that the fees for the Instant service are clearly disclosed, and consumers know what they must do to avoid the late charge; there is no risk of a whopping $35 overdraft fee, followed by multiple add-on fees, as there is if you overdraw a bank account. “We want to have transparency in fees,” he said.

You can, of course, skip the instant option. In that case, if you try to buy something without sufficient funds, the transaction is simply declined.

The Smokey Row Coffee Company,  with several locations in Iowa, has been accepting Dwolla at its Des Moines location since May and now does two to 10 transactions a day, says Mandy Miller, creative director at the shops. The service saves money that would otherwise be paid in credit-card interchange fees. “We don’t see any drawbacks,” she said.

Carter Bailey, a software developer near San Antonio, heard about Dwolla online and persuaded his landlord to begin using it. “It’s one of the easier Web services I’ve ever signed up for,” said Mr. Bailey, who signed up for Dwolla and authenticated his bank account using Twitter.

Of course, many more merchants and users will have to start using Dwolla if it is to reach critical mass. Mr. Milne says he thinks it can be done — and that, eventually, the system may even be attractive to banks themselves. “We believe our system can be leveraged by banks and consumers, and it would be valuable to everybody,” he said.

What do you think of Dwolla’s approach?

Article source: http://feeds.nytimes.com/click.phdo?i=77535f44543ba9c6174c1a0825099a9a