MR = MC (or, The @Dwolla Approach)

As one VC recently told me, “You can’t walk down the block without someone talking about mobile payments these days.” With new entrants (Square, Groupon, Dwolla) in this space, as well as incumbents (Paypal, ISIS, Google) increasing their payment offerings, there’s no doubt that the sector is ready to take off. 

Ultimately, each provider is offering a very similar proposition to the user: a convergent application that provides convenience and makes both online and offline payments more frictionless. There are clear advantages to the merchants as well, including comprehensive transaction data and consumer loyalty management. Most importantly, next-gen payments are disruptive because they’re trying to undercut the transaction costs traditionally set by the large payment networks (Visa, MasterCard, AmEx.)

Here’s a breakdown of the transaction fees for some of these providers:

  • Square: 2.75%
  • PayPal Here: 2.7%
  • Intuit GoPayment: 2.7%
  • Verifone Sail: 2.7%
  • Phone Swipe: 2.69%
  • Groupon: 1.8% + 15¢
  • Dwolla: 25¢ for transactions above $10 (implied 2.5% ceiling)

Unsurprisingly, Dwolla’s pricing structure is dramatically different (read: lower) than all other competitors. And for good reason, too.

Classic economics teaches us that in perfect competition, where products/services are undifferentiated and nearly identical, the market moves towards pricing that is equal to marginal cost. Or, in other words, MR = MC. By building its own FiSync backend, Dwolla is able to materially lower its marginal cost to near zero. As such, Dwolla not only preempts the market by offering the equilibrium price, but also understands that in a world of perfect competition, scale is the way to win the payments game. 

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