The Bankwatch

Tracking the consumer evolution of financial services

Dwolla offer real time money transfer for banks | but is this this the right model?

It was just a week ago when I wrote an open question to banks; “Banks – Why can we not have same day money transfer?

Well today I came across new Dwolla offerring they name FiSync.  They characterise the new service as real time money transfer through their cloud service and are oferring it free to banks.

Unfortunately, and sorry Ben, but I predict this will not succeed at least not as currently offerred.  The reason banks won’t accept as offerred is one word – float.

The post notes the value of ACH transactions annually at 33.9 trillion.  If we run that number at the NY overnight rate of 0.16% for 2,3,4, and 5 days the value of that money to the banks’ is large.  If we increase the overnight rate to more historic values, it increases rapidly.

overnight rate  \  Days 2 3 4 5
0.16% $297,205,479 $445,808,219 $594,410,959 $743,013,699
0.50% $928,767,123 $1,393,150,685 $1,857,534,247 $2,321,917,808
1.00% $1,857,534,247 $2,786,301,370 $3,715,068,493 $4,643,835,616


Unless one bank blinks, the rest have no incentive to take on the FiSync.   What would change that would be a Wells or similar taking it on then the rest would have to follow.

Relevance to Bankwatch:

There is another more subtle difficulty confronting FiSync and one that I suspect is why they are offerring free to banks.  The real stranglehold that banks have on payments is the shared systems they all operate on.  These include ACH and the credit card networks. 

The only way for a start up or a legacy bank to take those on is to go live with FiSync or something like that.  However they have no ‘network effect” while operating alone.  Customer A with money in a Wells account wants to send money to a customer at BofA.  In order for a startup to offer that service they could keep Customers A & B happy, but the startup would be required to fund the transaction until the ACH transactions clear with Wells and BofA.  The old banks retain a lock on their customers money and one of those locks is ACH. 

Its also worth noting that ACH has its roots in cheques which are declining rapidly in value.  That decline is being replaced to some extent by automatic debits for loan payments, bill payments and nascent debit card.

Another angle to attack which is ripe for competition is the incredible lucrative (to banks) merchant services business.  This is the fee revenue derived from credit card payments.  For every transaction banks charge the merchant anything from 1% ~ 4.5% +/-.    What is interesting to me in this space is that we have a relatively small group of merchants who would be highly motivated to move a portion of that merchant service fee to their bottom line.

Anyhow, kudos to Dwolla for trying to shake up the payments infrastructure.  I truly hope I am wrong and wish them well.

Written by Colin Henderson

May 9, 2012 at 20:49

Posted in Uncategorized

2 Responses

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  1. Interesting read, Colin, but one small clarification: typically, “merchant services” offerings don’t earn banks the 1%-4.5% margins you describe. Margins for merchant services–i.e. the tools that allow a merchant to accept credit card payments–are actually fairly modest, and this is not a majority revenue source for most banks. It’s the credit card *issuing* business–i.e. the banks issuing the credit cards–that earn the (sometimes substantial) interchange revenue that I believe you’re describing.


    June 27, 2012 at 15:51

    • Thanks for that clarification. I was describing what the merchant pays, but I believe what you are correctly noting is that banks earn that money through the allocation of interchange.

      Colin Henderson

      June 27, 2012 at 22:53

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