With a community-based state charter, Veridian Credit Union serves members in more than 30 Iowa counties, but the cooperative financial institution isn’t supposed to have members outside that field. And yet the credit union has been handling funds nationwide for the alternative payment company Dwolla since 2009.
The oddity of this relationship raises questions about its legality, and both companies say they've faced such questions from state regulators about the partnership's structure.
“These conversations – not investigations – have been in our favor for the last two years, evident by our continued existence in all 50 states,” says Jordan Lampe, communications head at Dwolla.
The two financial services providers have closed-door regulatory discussions, in which proprietary and transparent information is provided, Lampe says. He can’t discuss the details with the public. “We just can’t give away the blueprints,” he says.
His colleagues at Veridian Credit Union were more open about the workings of the relationship.
Veridian Group Inc., a unit of the credit union, started investing in Dwolla in December of 2010 alongside The Members Group, a company that equips community banks and credit unions with payment technologies.
Nick Evens, president of the Veridian Group unit, says the new entity can market Dwolla into the credit union and community banking space.
The operational side of the relationship is a different setup. Ben Milne, founder of Dwolla, was a member of Veridian.
“We wanted to help our member, Ben Milne,” says Evens. “We wanted to help him pursue the vision in the peer-to-peer payment space.”
Milne came to Veridian and offered a good case for the startup, so Veridian took Dwolla on as a business member. Under this relationship, the account that houses users' money from Dwolla is at Veridian, on its books, figured into its asset size.
Many states have questioned the structure, Evens says, because many states have differing regulations.
Veridian holds Dwolla’s deposits and is the back end structure handling Dwolla’s transactions through the Automated Clearing House (ACH) system.
“We’re holding funds for our member, Dwolla,” says Evens. “Where their funds come from, that’s really their business.”
Based on the credit union code in Iowa, the relationship is legal, he says.
“Understandably, ambiguity, half-truths, or traditional misunderstandings have continued to linger here and there, but not to the level of full-out 'investigation' that we or anyone else knows of,” Lampe says. “The fact remains that we whole-heartedly embrace these conversations — even encourage them.”
Inquiries to certain state Attorneys General offices, including that of Iowa, did not find confirmation of a formal investigation into the legality of Veridian's relationship with Dwolla.
The structure of the Dwolla-Veridian pact bears some similarities and differences to other partnerships between startups and credit unions. Zopa Ltd., for example, partnered with multiple credit unions when it brought its online lending model to the U.S. in 2007.
Zopa claimed that anyone in the U.S. could get a loan or CD from its six partner credit unions, which did not adjust their own membership requirements. This arrangement did not last. Zopa, a UK company, left the U.S. after just 10 months without providing a clear reason for its departure.
The Dwolla-Veridian relationship could demonstrate whether other payments startups might be able to acquire or partner with a credit union as a way to get around the need for state money transmitting licenses.
While money transmitter issues have come up, Evens says, Dwolla is a software platform, not a money transmitter.
“We’ve gone through painstaking research on the front end and continue to make sure we’re very upfront and cooperative with each state as they inquire,” Evens says.
Lampe agrees transparency is of utmost importance, saying, “Anybody that deals with the financial livelihood of other individuals doesn’t have the opportunity to operate ambiguously.”
The partnership, Lampe says, made both economic and cultural sense. Having an Iowan partner helped Dwolla invest back into the state its founder, Ben Milne, grew up in.
And both parties were looking for what the other offered.
Veridian viewed Dwolla as an emerging technology that offered an alternative for the credit unions’ members, Evens says. The partnership also helps Veridian make headway into the growing mobile payments market.
In June, Veridian launched a peer-to-peer payment system with Dwolla for its 170,000 members. From the beginning of the investment, the credit union knew it wanted to offer a P2P product to its members.
About 2,000 people have signed up for Dwolla through Veridian’s online banking site. Evens says the credit union would like to see a10% adoption rate, but he realizes many times people sign up and then never use the service.
“That’s just the nature of any online technology,” he says.
By using Dwolla, members of Veridian can transfer to and receive money from members and non-members, which isn’t a different strategy than other credit unions using PayPal as a provider, says Brett Engstrom, manager of web services at Veridian.
The credit union looked into other providers, Engstrom says, but found that Dwolla using FiSync can process transactions faster since the service sees if money is available in real time.
Although credit unions tend to be very member-centric, the Dwolla-Veridian pact is a major differentiator for Veridian, says Ed O'Brien, director of the banking channels advisory servie at Mercator Advisory Group.
In particular, Veridian benefits from access to Dwolla's FiSync payment service.
“Real-time transactions are something that many [financial institutions] and vendors are looking for,” he says.
Correction: An earlier version of this story misstated the ownership of Veridian Group Inc. It is a subsidiary of the credit union.