When Ben Milne was running a manufacturing company in Iowa, "you could not get around credit card fees," he recalls.

"We were paying $55,000 per year in credit card fees. That's not a huge deal when you're talking about a big business, but for a small business it's the difference between having a new employee or not," says Milne, who now heads the alternative payment company Dwolla.

Milne spoke at the Cartes America conference this week in Las Vegas. Dwolla charges 25 cents for each transaction above $10 and has no fee for any payments below that threshold. Milne contends that the pricier card-based payment model hinders innovation – especially for card issuers.

In the wake of Target's holiday-season data breach, banks had to reissue millions of compromised cards. It was a costly process.  "The industry is actually printing plastic, mailing it across the country and creating a static identity for that card that puts people at risk whenever that card is used," Milne says.

JPMorgan Chase's merchant services unit has developed technology that lets consumers access a reissued card from the Chase Wallet app before the plastic arrives by mail, but the bank still had to send out 2 million replacement cards.

Many other digital payment companies, including Google and PayPal, offer plastic cards to complement their digital payment offerings. Dwolla has never done this.

"The [Dwolla] interface is not a card," Milne says. "Any device that's connected to the Internet can make a payment and store authorization."

The company leverages an application programming interface (API) to integrate with other companies. "We took everything that a card does, we built a protocol and replaced the card," Milne said.

Dwolla is among a growing number of payment startups that is taking aim at the costs associated with handling credit cards. Some of these companies, such as LevelUp, absorb a portion of the processing fees and then bundle transactions to cut their own costs.

Dwolla uses the Internet as the payments network, enabling account-to-account transfers and credit-based real-time payments through bank partnerships. Dwolla, which acts as a clearinghouse for payments, currently serves about 35,000 businesses of different sizes, as well as government clients, Milne says.

Incidents like the Target breach will continue unless the payments industry stops relying on its aging infrastructure, Milne says. "To fix the problem, you have to start from scratch."

Dwolla scans for fraud by analyzing data such as balance, device, a person's associations, customer behavior and the channel used to access the network. "When you apply machine learning to this data, the needle in the haystack bubbles to the surface pretty quickly," Milne says.

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