Dwolla's plan to capitalize on interchange-fee war

Amazon's recent threat to ban Visa credit cards in the U.K. over acceptance costs is emblematic of a much larger rift in the payments industry over whether cards are still worth the expense in an era when so many digital payment alternatives exist.

The conflict also comes as Visa and Mastercard plan fee hikes for certain payment types in 2022.

The good news for banks and credit unions is that even if cards fall out of favor, issuers will still have a role to play in digital commerce by combining real-time payments with account-to-account transfers, according to Dwolla President and Chief Operating Officer Dave Glaser, who has worked on both the card network and fintech sides of the payments industry. Less costly account-to-account payments are expanding as mobile wallets and noncard options such as buy now/pay later gain ground.

"Banks will continue to choose to be credit card issuers, but we think that account-to-account payments will give cards a run for their money because of the higher fees with card payments," Glaser said.

Glaser, a former Mastercard executive who helped lead new payment technology initiatives such as the card brand's cloud-based point-of-sale acceptance technology, joined Dwolla in March to facilitate its efforts to create new payment automation partnerships.

While Dwolla, which is based in Des Moines, has been signing deals, Amazon's threat to halt Visa credit cards in the U.K. has drawn fresh attention to credit card costs and the potential of emerging alternatives such as real-time bank transfers. Research from FIS and Worldpay, for example, shows digital wallet and buy now/pay later apps are expected to pass credit cards for e-commerce payments in North America over the next four years. (While digital wallets can use credit cards for funding, they can also draw from a stored balance, prepaid card or bank transfers.)

Other payment fintechs are pursuing account-to-account partnerships.

Cellpoint Digital, a London company that provides payment acceptance and processing for merchants, in late November announced a partnership with Vyne, an account-to-account payment service provider based in London. The partnership will allow Vyne to offer real-time payments to CellPoint's merchants to speed transactions, lower costs and remove the need to enter credit card account information during checkout. Vyne and CellPoint did not return a request for comment.

“Existing payments and banking solutions are broken, and stacked against the merchants and consumers that use them. Payment methods come with a variety of settlement formats and can take anything from days to weeks to complete with customer conversions impacted by manual card data entry," Vyne CEO Karl MacGregor said in a press release.

Account-to-account payments transfer funds directly from the payer's bank account to the payee's bank account. With real-time payment rails are increasingly used to execute account-to-account payments, the option is becoming more practical — and less costly — than options such as cards.

"Demand for account-to-account payments is coming from large merchants, since real-time account-to-account payments are cheaper, faster, and less complex to handle than credit card payments," said Ron van Wezel, strategic advisor for retail banking and payments at Aite-Novarica.

Dwolla this week entered a partnership with Infinicept, a Denver-based company that develops merchant payment technology for onboarding and risk management. Infinicept operates a partner network that connects payment companies with processors.

The Dwolla-Infinicept partnership is designed to decrease overhead for firms wishing to support account-to-account payments. That follows a partnership Dwolla signed in November with payment data company Plaid to provide account-to-account technology. And in July, Dwolla partnered with MX, a Utah company that provides account verification for about 4,000 financial institutions, potentially making it easier for transactions to move quickly between bank accounts.

That accompanied other recent moves at Dwolla, such as connecting to The Clearing House's RTP Network in April, enabling businesses to use Dwolla's application programming interface to connect to financial institutions on the RTP Network. Dwolla in June simplified its API by reducing coding, a move designed to appeal to nontechnical users.

About 150 banks are part of the RTP Network, out of about 5,000 banks in the U.S. Analysts have bemoaned this as slow progress toward adoption real-time payments among banks.

"It's important that more banks connect to RTP to build ubiquity in the network," Glaser said. "There are a lot of large banks in the network, but we want to get that number close to 100% so there are no gaps."

While merchants may increasingly favor real-time digital account-to-account payments, banks may lag.

The business case for real-time account-to-account payments at retail banks is unclear, as without competitive pressure to support the model, it simply costs them the interchange revenue they would get by sticking with cards, van Wezel said.

"But I think the walls have broken and account-to-account payments are flooding the payment markets," van Wezel said.

The costs of accepting credit card payments can vary by merchant. An analysis by Nacha notes that costs can include interchange fees, acquirer fees — which can make up 50% of the costs of card payments for small merchants — and assessments and dues to the card networks, which can make up 10 to 15% of the total cost of card payments for merchants.

"Card cost is one of the big line items for merchants," Glaser said. "The bigger merchants are looking to cut those costs through negotiation, but there are other forms of payments. There are debit cards, which are a little bit cheaper, but there's still interchange."

Account-to-account payments have been possible for decades, but Dwolla is betting there will be more demand because of new disputes over interchange fee hikes, as well as a proliferation of payments that don't require credit card accounts for processing, such as mobile wallets, open banking and real-time bank-funded transfers.

"Any person with a bank account is probably already using ACH for rent, or paying a bill," Glaser said. "But that network is 50 to 60 years old. Using it for internet-based payments means using legacy interfaces. There is a way to improve account-to-account payments."

With the growth of APIs and cloud-hosted technology, processing time can be cut to near-real-time, according to Glaser.

Real-time payments are more expensive than traditional wires, however. "We may see banks decide to prioritize certain transactions for real-time payments to manage that cost, such as payments to gig workers," Glaser said.

Payment options that support real-time account-to-account payments and buy now/pay later financing will expand as an alternative to credit cards in coming years, though credit cards will probably not be totally supplanted, Glaser said.

"With BNPL consumers are usually using their checking account to pay the loan, which goes to the BNPL provider's bank account. The closer the payment gets to the account, the lower the fees are going to be and the simpler the process is," Glaser said.

Additionally, the card networks are implementing rules and designing technology to reduce fraud, which additionally drives up costs for merchants, said Tim Sloane, vice president of payments innovation at Mercator Advisory Group. "One likely outcome of this three-way battle between crooks, merchants and the payment networks is an increase in the merchant rate of adoption for account-to-account payments that utilize open banking APIs," he said.