To Speed Payments, BBVA Opens Its Tech Black Box to Dwolla

BBVA Compass is launching real-time payments through Dwolla, but the really interesting part is what's going on beneath the surface: the bank is opening its technological black box to a nimble startup in order to speed innovation.

At most banks, the technological heart of everything they do is a massive set of hardware and software called the core processing engine. It often runs on a mainframe and it processes all day-to-day transactions — debits and credits to checking and savings accounts, loan payments, ATM transactions, and so on. The core may be old, but it works and is kept very secure.

Recently banks have started to consider giving creative young tech companies access to this plumbing through application programming interfaces, or APIs. Burdened as they are by regulations and complex processes and bureaucracy, banks struggle to innovate internally. A tech startup has no such baggage and can bring fresh thinking and new ways of doing things to the financial industry.

Citigroup, for example, has begun offering application program interfaces to its consumer channels, to let software developers quickly create new apps for the bank. The bank sees APIs as a way to improve customer service while "creating opportunities for companies that don't offer banking services and don't deal with the highly regulated environment we deal with," Vanessa Collela, managing director and head of global venturing at Citi Ventures, said at a conference Tuesday.

Among financial institutions, BBVA Compass is notably startup-friendly; it bought the "neobank" Simple last year and made a large investment in January in the virtual currency exchanger Coinbase.

On Wednesday, the Birmingham, Ala., bank went live with its partnership with Dwolla, the Silicon Prairie tech startup that investor Ashton Kutcher calls "pretty damn cool." Dwolla transfers money directly between bank accounts for 25 cents per transaction, or free for transactions less than $10.

For the rare bank that can process transactions internally in real time (rather than in batches), a partnership with Dwolla means it can offer real-time payment settlement to customers.

The $80 billion-asset BBVA Compass is one of those banks. It completed a core replacement in 2013, taking on Accenture's Alnova software, which runs everything in real time.

Having a modern core system makes it easier for a bank to provide APIs to tech partners like Dwolla to build connections between their technology and the bank, or to build special software just for the bank.

"We're trying to create technology to not only support external partnerships but create a set of services that encourages disruption in the organization," said Chad Ballard, director of innovation and mobility at BBVA Compass. "Partnerships like this speak to that."

A business customer of BBVA Compass that pays 3,000 people twice a month could use Dwolla to send those payments instantly, without having to cut checks, preload an account or wait for automated clearing house transactions to clear.

"The business can make those payments at the last second — Saturday at 2:00 a.m. if they want," said Ben Milne, Dwolla's CEO. "The 24-hour delay is now eradicated. The second that page loads, the money moves." The company doesn't have to make employees wait to get paid. And it doesn't have to put money in a third-party account.

There are people who go to check cashers or payday lenders when they need their paycheck money right away. There are times when a few days make a difference.

"If there was something that allowed hourly workers to be paid as they clocked out, why wouldn't they do that?" Milne said. "I think that's the type of solution we'll see developers building. Over the next six months it will be interesting to see what innovations come out."

And BBVA's retail customers will be able to send fast payments for 25 cents a pop to others with accounts connected to Dwolla's service.

To keep its customer data private, BBVA will provide authorization and tokenization for the payments.

Customers will use the same user ID and password they use for online and mobile banking (the service is only available to current deposit account holders). BBVA will tokenize the account information before sending it to Dwolla.

"They don't have the account number. They have tokenized data and then from that point forward, that data is managed between Dwolla and BBVA Compass in tokenized form," Ballard said.

That independent, secure token not only protects the customer's account number but also gives everybody involved in the transaction transparency and control, Milne said.

"If BBVA decides it doesn't want the network to have access anymore, if Dwolla decides that it sees bad behavior and it doesn't want that account to be connected anymore or if the consumer decides they don't want that account to be connected anymore, the token and permission can be dropped, and if someone ever finds the token, it's garbage," Milne said.

BBVA Compass says it is open to sharing APIs with other tech partners.

"We do see that as the future," Ballard said. "We think about what this will be for the industry. The idea of banking as a service -- we take all the services banks are using themselves and provide them to partners. I think it creates open innovation and we think we'll be a leader in this space. Banks that can't adapt to the changing landscape against innovative partners like Dwolla need to work in this space."

BBVA is hoping customers will switch banks for this new service. "We think the partnership between Dwolla and BBVA is creating value to the customer they just don't have today with a basic checking account," Ballard said.