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Rick Vosper: Fwolla the Dwolla

Published March 13, 2012


There are any number of things National Bicycle Dealer Association Executive Director Fred Clements doesn't mince, and words are some of them. Ask him about the effect of credit card fees on retailers' already modest profit margins, and he'll tell you flat out: "It's a black hole of conspiratorial behavior on the part of the credit card industry."

Credit card transaction now make up more than half of all bike shop purchases,  Clements says. Not only does your LBS pay between 1.9 and 3% on the post-tax retail value of every transaction, but there's also a dizzying array of per-transaction fees (10-15 cents apiece), monthly program charges and other hidden fees, not to mention the cost of the machines and phone lines themselves...  just to turn that piece of plastic in the consumer's wallet into a piece of revenue for their businesses.

A Little Trick I Like To Call "Math."
Let's call it 3% on average when everything's said and done. And what it means to bicycle retailers is that three points of already-scarce profit margin goes missing from every credit card transaction. And, as you might expect, that's three margin points they'd very much like to get back.

Total gross sales for the USA specialty retail sector in 2010—bikes, equipment, rubber, service, apparel—  runs about $6 billion. If half of that sum is purchased with credit/debit cards at 3%, that's ninety million dollars a year in pure profit being taken away from your friendly local bike shop and siphoned directly into the pockets of credit card companies, transaction facilitators, and what the industry calls "authenticators"—bottom-feeding denizens of the financial waters with deceptively bland monickers like VeriFone or ACH.  Which, as we'll see in the next paragraph, is about eighty-nine and a half million dollars too many.

Fwolla the Dwolla

2009 was a really crappy year for the bike business—probably the worst in its 150-year history. But it was a pretty good year for a gentleman named Ben Milne. Ben founded a company called Dwolla (the name itself is a portamenteau of Dollar and Web, but don't let a dopey name sour you on a smart concept). Dwolla uses its own systems to securely process transactions for a lot less than the big guys charge.

How much less? A quarter.

Not "one-quarter less than the big guys." Or even "one-fourth of what they're charging." But a real, honest-to-god quarter. Two bits. A couple of dimes and a nickel. So if a thousand-dollar bike purchase takes $30 off the retailer's bottom line, the same purchase made via Dwolla only costs him 25¢. Unless it's a small purchase, say less than ten bucks. Because in that case, my friend, the whole thing's free.

You can read some good articles about the Dwolla model here and here.

So What's The Catch?
The only real thing holding the Dwolla model back is what game theorists  call appropriating value and you or I might call the "What's in it for me?" problem. Because unlike the traditional credit card machine,  creating a Dwolla transaction requires both the merchant and the customer to have Dwolla accounts.

From the retailer's point of view, the incentive is obvious: 3%. From the consumer's point of view, not so much. The buyer, after all, not only has to sign up for the Dwolla service, but also foregoes the convenience of not having to actually pay for his purchase until the credit card statement comes in the mail.

But what if the retailer shared some of that value with the customer (or in game theory jargon, allowed the consumer to "appropriate" some of it)?

Now you've got the basis for a win-win situation. 

A Modest Proposal
Let's go back to our thousand-dollar bike example for a minute. Would, say, 1% (ten bucks) off the purchase price  be enough to answer the what's in it for me? question and incentivize the customer to open a Dwolla account and have the funds taken out of his bank immediately?  Maybe not.

But what if the retailer offered to donate 1% of the consumer's purchase price to World Bicycle Relief or People For Bikes in exchange for taking part on the two-minute online Dwolla registration process? Heck, if I know anything about cyclists, you'd have to hold them back from vaulting over the counter and commandeering the computer screen for themselves.

Now if we were talking about pizza parlors or used care dealerships, there's probably not enough incentive to go around. But there are four things that make the specialty retail bike business uniquely suited to the Dwolla-style transaction model:

  • Local bike shops are exactly that—local—and unlike Big Box Stores or national chains, customers have a vested interest in helping their local retailer succeed.
  • Cyclists themselves benefit directly from  investment in advocacy. And they know it.
  • Because it's such a strong win-win, the model would enjoy support from consumer magazines and other key opinions makers. And the whole thing could even be done under the aegis of Bikes Belong, the industry's advocacy organization.
  • For all three reasons listed previous, the model would almost certainly not be of interest to companies like or Wal-Mart, creating even more reason for cyclists to  spend their hard-earned dollars at their local bike shops.
If just half the nation's 3,000 specialty retail bike shops choose to participate (and to put two additional points directly on their bottom line,  who wouldn't?)  and half of their consumers opted in, the $90 million pie we were talking about at the top of the page shrinks by three-quarters, to a more modest $22.5 million.With two slices of that pie going to retailers and one to advocacy, we're talking about  $14,985,000 distributed among 1500 retailers ($10,00 dollar of pure pre-tax net profit apiece) and $7,493,000 to advocacy. And that's only the first year. Customers who've opted into the program will tend to stay in (after all, the biggest obstacle is two minutes of online registration and it's all for a good cause, right?)  and more will join them. Because cyclists win. And retailers. And advocacy organizations.
The only downside in fact, is the $22.5 million that won't be going into transaction companies' pockets anymore. And don't you think that'd be a horrible shame?

Me neither.


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