PayPal vs. Dwolla: Which is Right for You?

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PayPal is one of the largest financial transaction tools available online. Boasting over 128 million accounts and exchanging payments in 25 currencies, PayPal is a dominate leader in online commerce. Of course everyone loves to hate PayPal, too. The company has had its fair share of negative press: from high costs for users to incompetent…

PayPal is one of the largest financial transaction tools available online. Boasting over 128 million accounts and exchanging payments in 25 currencies, PayPal is a dominate leader in online commerce.

Of course everyone loves to hate PayPal, too.

The company has had its fair share of negative press: from high costs for users to incompetent customer service to accounts being locked with thousands of dollars inside, they have developed a reputation of “can’t live with them, can’t live without them” among users.

The transaction marketplace is changing. New competitors are cropping up: Amazon has launched Amazon Payments which is similar in cost structure to users. But the most interesting new competitor to PayPal is Dwolla.

What is Dwolla?

Dwolla is payment network like PayPal and Amazon Payments. The company’s goal is to allow anyone with an Internet connected device to transfer money to another party at the lowest cost possible.

How low?

Transactions under $10 are free. Above that the transaction cost is a flat 25 cents. Yes, 25 cents total for the transaction.

Unlike PayPal and Amazon Payments, Dwolla disallows credit and debit cards. The company connects directly to your bank account to transfer funds. Avoiding the credit and debit card networks drastically reduces costs for users.

Comparing Dwolla and PayPal

Here are three areas of consideration to compare the two payment networks.

1. Transaction Costs

The biggest complaint about PayPal is the huge chunk of money it takes out of each transaction. Dwolla aims to disrupt that model by offering either free transactions or those that cost just $0.25 for the receiving party.

  • PayPal Buying & Selling:
    • Buyer: Free
    • Seller: 2.9% plus $0.30 (can be discounted down to 2.2% with heavy volume)
  • PayPal Sending Money to Friends and Family:
    • Funded From PayPal Balance or Bank Account: Free
    • Funded From Debit or Credit Card: 2.9% plus $0.30 (sender determines who pays fee)
  • Dwolla Buying & Selling:
    • Buyer: Free
    • Seller: Free if $10 or under, $0.25 if over $10
  • Dwolla Sending Money to Friends and Family: 
    • Free if sending/receiving under $10, $0.25 if receiving over $10

As you can see if you are sending money from your PayPal/Dwolla account (tied directly to your bank account) to a friend, and you are sending $10 or under, the transaction costs the same: free.

Over $10 and Dwolla charges you 25 cents while PayPal is still free.

The big difference is for sellers looking to accept payments online. Dropping your total transaction cost down to 25 cents from 2.9% plus 30 cents is a huge difference. A seller with ten $100 transactions would go from paying $32 in PayPal fees to paying $2.50 in Dwolla fees. That really adds to the bottom line.

2. Security

PayPal touts it is the most secure payment network in the world thanks to being in business since 1999. They’ve got quite the headstart over Dwolla. Of course being the biggest also means you are the biggest target for hackers and scammers, and PayPal has had its issues with those.

Dwolla touts that its biggest security draw is that your personal financial information is never shared with the other party. All they get is either your email address, Dwolla ID, or phone number as part of the transaction. In theory they have no access to your bank account information or your personal identifying information which limits the threat of identity theft.

One key security difference is with PayPal if you pay with a credit card you have your credit card’s backing if a transaction goes awry. With Dwolla you are sacrificing this benefit to get the lower transaction costs.

3. Customer Service

PayPal has long had a reputation of just horrific customer service. Accounts locked for no reason, accounts banned for no reason, never being able to reach a human being on the phone . . . you name it, PayPal’s had it written about them. That comes with the territory when you are transacting $41 billion in the first quarter of 2013 alone. There just isn’t a way to put enough people in customer service to handle all of the issues (or so PayPal would have you believe; eBay as a whole did earn a net income of $677 million in Q1 of 2013 which would help pay for a lot of customer service reps).

While Dwolla does not list a customer service phone number on their homepage, there is a phone number available once you sign up for an account. Time will tell if Dwolla can live up to customer service expectations.

Should I Use PayPal or Dwolla?

If you are a business that currently accepts PayPal payments then Dwolla is a great alternative. Dropping PayPal’s 2.9% fee alone adds that much margin to your bottom line. If you are a coffee shop or other retailer with a majority of your transactions below $10 then you could accept payments for no charge.

If you normally use PayPal to send money to friends and family from a bank account, then the company has a slight edge because of the lack of fees it charges for any transaction amount. Dwolla charges you the nominal 25 cent fee on transactions over $10.

When it comes to security and getting in contact with either company, it seems that it’s possible to run into some frustration with either company. Dwolla is certainly the cheaper alternative, but PayPal has the most experience.

Which payment method is right for you as a business or consumer? Leave a comment and tell us which and why!

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About Kevin Mulligan

Kevin is a debt reduction champion with a passion for teaching people how to budget and build wealth for retirement. He’s building a personal finance freelance writing career and has written for, Good Financial Cents, Moolanomy, and many others.

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  1. Michelle says

    I’ve never heard of Dwolla, but wow that is a big difference in fees. I pay a ton in PayPal fees every month.

    • Ryan Guina says

      Michelle, I would at least look into Dwolla if you are paying a lot of PayPal fees. Not everyone is using it yet, but just a few clients or customers using it can save you a lot of money in PayPal fees. I try to offer people I work with the opportunity to receive payment via PayPal and check, and I just started using Dwolla, so that is an option now too..

      • Colleen says

        I have seen you posted about Paypal and Dwolla. I’m not sure how long ago you posted you did say you started using Dwolla. I was wondering how it is going for you?
        I ask because I am starting to go out to outdoor vendor events and I thought it may be beneficial to offer mobile transactions.
        If you have any information that may be of benefit I would greatly appreciate it.


  2. Pauline says

    Thank you for the tips! Will have to check that, I too pay quite a lot of fees each month. If I register and then send money to someone’s email, is it complicated for them to get the funds?

    • Ryan Guina says

      Pauline, Dwolla works very similar to PayPal. If they have an account, the process only takes a couple days. I don’t have any experience sending money to someone who didn’t already have an account. But the approval process is quick and easy, and the lower fees make it well worth opening an account if you receive a lot of money via online payments.

  3. Jerry says

    I wonder the amount of work needed to switch from eBay to Dwolla. We are completing our ecommerce site development using Paypal. But I just found out Dwolla. I wish I found out Dwolla a few months sooner. What is the effort level of rework to switch to Dwolla?

    • Ryan Guina says

      I don’t know, Jerry. But it’s probably worth looking into. I will say that PayPal has been much more widely adopted so far, so if you are looking to make things easier on customers, then PayPal is probably the way to go, at least for now. Giving customers an option may be a good idea, but if I were building the business, I would make that a later iteration of the site and focus on getting the minimum viable product out the door so you can start making money now. Then you can adapt and improve as you go. Best of luck with your venture!

  4. Diane Walker says

    Thanks for bringing this new process to our attention. I am researching alternative methods for non-profits and churches to receive donations that would have lower fee attachment. It is hard enough to obtain donations — we need more of the monies to be applied to the solution and not to the “transaction”.

  5. Average Joe says

    The info is inaccurate. PayPal DOES charge you to send money to relatives and friends. A buck for a hundred dollars send. And then they will not let you do it twice in a row. And will not let you do it without ‘verification’ of the account through the phone…which in some cases is impossible.

  6. phyllis hathcock says

    I have a PayPal account that I’ve had for several years now but I’ve only been actually using it for sending and receiving payments for the past 5 or 6 years. I have never had any problems with my account but it does cost, $100.00 cost exactly $4.20 to receive but only if the person sending doesn’t use their PayPal account to send it. I was looking at the dwolla site and there’s not very much info on their site about how there transactions work. I don’t have a bank account and they say nothing about how to get your money. I’ll just stay with PayPal they’ve been great and have helped me when I didn’t understand something, so I don’t mind the fees.

    • Ryan Guina says

      I do believe Dwolla requires a bank account for sending or receiving money. But the lack of PayPal’s high fees make it a much more attractive option for many.

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