Dwolla adds data partnerships to boost security for account transfers

Merchants want a cheaper alternative to payment cards, but the card networks contend that their fees are necessary for fraud prevention. Dwolla is working to create a system that cuts costs without compromising security.

Interchange fees have been subjected to political pressure, with potential action from Congress, and pressure from large merchants such as Amazon and Walmart over the past several years — particularly as account-to-account payments, which allow funds to be transferred between bank accounts without using card rails, gain in popularity. 

"With card payments a lot of the data supports fraud mitigation," said Yasser Abou-Nasr, senior vice president of product at Dwolla. "But with this data you can do account verification and a lot more than that going down the road." 

Dwolla has added security from MX Technologies to its Secure Exchange product, an open banking program Dwolla initially launched in July. This builds on the MX and Dwolla partnership announcement from last year, as they continue to focus on delivering a robust account verification solution to their shared clients and partners.

MX has been a data aggregation partner for Dwolla for three years. Dwolla will use the MXapi Processor Token to provide its partners with a way to verify accounts without using sensitive data or third parties to move funds between accounts. A token refers to identifiers that stand in for real account information, and are unusable for fraud. Tokenization is used to protect online payments through the card networks' universal buy button, for example.  

In addition to shielding account information, MX's technology will broaden access data for Dwolla's other partners. 

"There is access to credentials, balance information, transaction history, etc.," Abou-Nasr said. "We can get those data sets into our ecosystem and repurpose them."

The result could be a tailored credit offering that takes a user's personal payment history into consideration, Abou-Nasr said, adding there could be numerous financial products that could be spun off of the ability to execute, track and accrue information for A2A transfers. 

Dwolla's Secure Exchange is designed to expedite the development of open banking through access to data exchanges. Open banking refers to sharing financial information among banks and third parties such as fintechs to provide access to a broader product set.

Secure Exhange's partners include Finicity, a data aggregation company Mastercard acquired in 2020. Finicity, for example, has fueled Mastercard's own bank-driven payment alternatives, including a platform that supports applications for buy now/pay later lending, and the Payment Success Indicator, which uses bank account information to manage risk for A2A payments and real-time processing. 

Use of the MX token is part of a larger strategy at Dwolla to compete in the A2A market, including the 2021 hiring of David Glaser as chief operating officer. Glaser, a former Mastercard executive, has played a key role in Dwolla's growth since joining in early 2021.

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"People are looking for new ways to pay bills, open new relationships and find a quick way to pay for a purchase. All of these cases need access to bank accounts," said Corinne Bartow, vice president of business development at MX, where she is also responsible for fintech partnerships. 

A bank app has easy access to an account number and routing number, Bartow said, but it's more complicated when open banking relationships involve fintechs, which often aren't regulated in the same manner as banks or other fintechs. "The fintechs don't always want to handle this kind of data," Bartow said. 

A2A payments have existed for years, but are gaining more attention as a way to complement, rather than replace, card payments.

Payment firms are rushing toward the opportunity. Real-time payment processor Click2Pay launched a developer portal this year that's designed to make it easier to integrate Click2Pay's product into a retailer's point of sale through an application programming interface. Click2Pay's fees are about half of card interchange. 

While the fees for A2A payments vary, it's generally a flat rate that makes payments cheaper than cards for transactions above $45, according to Kieran Hines, a senior analyst at Celent, which did an analysis on A2A payments. 

"Where it's particularly useful is for a larger purchases, something like electronics," Hines said. "If it's into the hundreds of dollars a flat fee makes a big difference." 

Other moves include Amazon adding Venmo and Affirm as payment options alongside cards; and Discover Financial Services collaborating with the fintech Buy It Mobility Networks to allow consumers to pay for everyday purchases such as gas and groceries directly from their bank accounts using the Automated Clearing House rail.

There is a substantial addressable market for card alternatives. Digital wallets and buy now/pay later apps are expected to pass credit cards for e-commerce payments in North America in the next three years, according to research from FIS and Worldpay.

 And as open banking and embedded finance expand, it's possible consumers may connect with multiple apps, making it more difficult to track the different companies that are handling their money.

"The token allows them to share information in a more secure manner. And in a lot of cases the consumers don't necessarily know who their third-party providers are, which can create some risk," Bartow said.