New Service Lets Small Businesses Bypass Big Bank Fees

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NEW YORK (MainStreet) – Retailers aren’t too fond of debit and credit card transactions. After all, each time you use plastic to make a purchase, they must pay an interchange fee to banks and credit card companies. Some retailers use the electronic payment service PayPal, but that charges transaction fees based on a percentage of the total purchase, which can really add up on big-ticket items.

Fortunately there’s another alternative that could prove itself cheaper for some retailers, and also end up benefitting consumers.

Enter Dwolla, a new electronic payment network that charges retailers a flat fee of 25 cents per transaction. And starting in 2012, the Des Moines, Iowa-based startup is not going to charge any transaction fees for retail purchases $10 and under, which could be especially advantageous to small businesses like coffee shops that sell inexpensive goods.

Dwolla isn’t a bank or credit card processor; instead, it works with financial institutions to give merchants a way to accept cash electronically through its network.

Dwolla’s founder and president, 28-year-old Ben Milne, is a former retailer himself who previously owned a speaker manufacturing company. The idea for Dwolla was inspired by Milne’s own frustration with interchange fees. In an interview with Business Insider, Milne said that his company was paying $55,000 annually in such fees to credit card companies, and felt credit card companies were “stealing” from him.

Dwolla’s surcharge-free deal for inexpensive purchases may not only be a boon for smaller merchants – it could be advantageous to consumers, since small businesses may pass along some of those savings to customers in the form of lower prices.

For merchants who paid $48 billion in merchant fees in 2010, according to the Merchants Payment Coalition, Dwolla could be a no-brainer. The company is already moving between $30 and $50 million in payments per month, and 3,500 retail merchants have reportedly signed up for the service.

But for credit card companies and big banks, the service could prove to be a big pain in the neck.

With big banks catching a lot of flack for their fee policies, alternative payment schemes are set to grow next year. Check out MainStreet's look at The Biggest Consumer Trends of 2012 to find out what else is in store!

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