Square what? Dwolla shows the power of cash networks

While tech darling Square has been growing its mobile payments business at a rapid pace, it’s far from the only success story in the business. Over in Des Moines, IA, mobile payments start-up Dwolla is enjoying its own impressive growth and just hit $1 million in daily transactions, putting it on a faster initial pace than Square.

Dwolla launched its product in December and differentiated itself not only with its midwest roots but also its cash-based network approach that allows users to pay directly from their bank accounts. By combining this with location-based technology and social networking tools, Dwolla has been able to build a next-generation payment system that bypasses the current credit and debit networks and offers some attractive benefits.

Square, which does utilize existing credit networks, took 10 months to hit $1 million in daily transactions and is now up to $4 million in transactions a day. Dwolla was able to reach the $1 million mark in about seven months. It has about 30,000 users on its network.

CEO and co-founder Ben Milne said Dwolla’s growth validates the power of tapping cash networks and applying new technology and APIs to help build a modern payment network.

“When you talk about cash, it’s not represented in the marketplace electronically. If you’re paying with a phone or on a website, what is the cash equivalent? There is more money moving through system through cash than credit. It’s an underserved market and it’s massive,” Milne said.

Dwolla transactions fees are capped at 25 cents per transaction, which is lower than PayPal(s ebay). And users are able to send money to their social networking contacts on Twitter and Facebook. Merchants are able to accept payments without adding extra hardware and using Dwolla’s system, they don’t have to store credit information, which limits fraud. And with Dwolla’s Spots mobile payment service, users can pay for offline goods without using credit or physical cash. Dwolla also enables banks to offer users instant access to their bank accounts from mobile devices using its FiSync service. So far, 15 banks are signed on to use FiSync.

Dwolla still faces challenges in replicating Square’s success, however. It has less name recognition and it seems to have less traction with merchants by comparison. But Milne believes that as more financial institutions sign-up and give their consumers access to mobile payments from their bank accounts, usage will rise. Users are also learning about the service through word of mouth, he said.

Dwolla is showing that this cash-based approach is viable and it’s something that shouldn’t be overlooked in the mobile payments race. EWise, another payment provider, uses what it calls secure vault payments, a form of online banking epayments, to help users pay for things online and through their mobile phone. Users can log-in to their SVP at the time of check-out and quickly fund a purchase from their bank account at cheaper rates than credit card transactions.

EWise CEO Alex Grinburg recently told me that tapping bank accounts for payments offers users and merchants an important choice that can reduce the cost of fees and drive up transactions. He said it’s also something that can be tapped now while others are waiting for near field communication payments to emerge.

“There is no reason to separately fund a wallet or a separate PayPal balance. That’s not where the money is. If you have a bank account you’re good to go, that’s all you need,” he said.

This is still early days in mobile payments, but we’re often hearing most about specific approaches like NFC, carrier billing or services like Square. But there is a lot of room for innovation and as Dwolla and eWise are showing, there’s a big opportunity in tapping cash accounts to fund payments online and offline.