Dwolla pockets $5M for mobile credit card services

Union Square, Village, Thrive and others invest in a flat-fee service for credit card transactions

The credit card alternative, Dwolla, has announced Tuesday that it raised a $5 million Series B round for its Des Moines, Iowa-based startup.

The fee-free payment network that was created as an alternative to the pricey fees that come from taking PayPal or credit card fees, received this funding in a round led by Union Square Ventures with participation from Village Ventures, Thrive Capital, Paige Craig and Marc Ecko.  This brings the total funding to just over $6.3 million.

Compared to the credit card transaction percentage fees that can range from 2%-5%, Dwolla runs on a model where each transaction is charged one flat fee of $0.25 -- and all charges under $10 are free. This is a huge change to the model and a big boon for companies, such as delis, convenience stores and other places were small transactions could be lost if they require a charge minimum. 

Since it was founded in 2008, Dwolla has grown its network to 80,000 account holders -- equating to millions of dollars per day in transactions. 

Moving forward, Dwolla will be focused on educating users and merchants about Dwolla and the benefits of the flat rate rather than the percentage model. 

Many small businesses (and some of the big boys as well) are looking at different technology to not only make transactions easier, but also to make the fees they spend minimal. 

Similar to the newly popular Square system, Dwalla capitalizes on the importance of being compatible with payment systems already in businesses as well as the ability to be completely mobile for payments on the go. With a small 17 person staff in Iowa, Dwolla is trying to bring the innovation of the Silicon Valley to the "Silicon Prairie."

The CEO and founder of the company, Ben Milne stated in his blog Tuesday that the company has grown usership over the last year 2,500% and the number of merchants by 3,700% -- this equates to savings in the millions, just from the fee model difference. 

The company also provides the hardware needed for small businesses to convert or add on the mobile payment services they have, so that the transistion is not a painful cost to the merchant.

"We set out to build an ubiquitous cash-based payment network that allows anyone with an Internet connection to access their money and buy the things they want in a way that bypasses the costs of the current system," wrote Milne in his blog. "The person receiving their money shouldn’t lose 3% or 10% or 30%."

Mobile systems have become the must-have technology for payment service. Square has been leading the charge by showing small businesses the advantage of mobile payment as well as entering T-Mobile stores and even the Obama campaign over the last three months.

According to investment bank Barclays Capital, purchases made on smartphones and tablets hit $5.3 billion in 2011, up 83% from the year before. And projections are showing that by 2014, usage by consumers will grow 600% to 490 million worldwide.

It seems that we have only just begun to re-imagine what you need to have or do in order to get payment from customer to merchant and Dwolla is competing to be as big a part of this vertical as it can.