The alternative payment provider Dwolla's recent partnership with the Iowa state government earns the company credibility while also opening the door to an area that needs to modernize the way it handles money.

The government "is the last bastion of where technology hasn't hit," says Michael Bousselot, policy advisor to Iowa Governor, Terry Branstad. "If we want to serve the people we have to turn to technology; innovation has to be a part of that solution."

This news comes after suggestions that Dwolla's work with Veridian Credit Union was being reviewed as a breach of the credit union's charter to serve members only within Iowa. Though Dwolla serves customers nationwide, Dwolla and Veridian Credit Union say the companies have spoken with regulators and done the research to make sure the relationship isn't a problem.

Dwolla, which launched its payment system in 2009, has recently been trying to find new niches for its alternative payment system. Last month, it launched a system for initiating transfers over Twitter, a move that other companies have attempted with mixed results.

Dwolla has long looked for ways to integrate into governments, says Jordan Lampe, communications head at the Des Moines, Iowa-based payment network.

We're "trying to create new opportunities for financial growth," Lampe says. "Right now when the government is looking at ways to cut deficits and stretch budgets, we're allowing the government to do better business."

The state of Iowa seems like the obvious first government partner for Dwolla, a Des Moines, Iowa-based startup, but "this doesn't have to do with [Dwolla] being an Iowan business but instead a business that makes sense for Iowa," Bousselot says.

Even so, a state government doing business with a local startup makes sense from a taxpayer standpoint, especially since the economy remains rough with unemployment high, says Gwenn Bezard, research director at the Aite Group.

"The state of Iowa is obviously paying attention to one of its startups," Bezard says.

The credibility the government arrangement lends Dwolla could lead community banks and credit unions to integrate with Dwolla's network. And Lampe says new partnerships statewide are in the works over the next few months.

But Bezard would like to see Dwolla get more business outside the Hawkeye State so "there's no political agenda in question," he says. Even so, "startups are not the typical types of businesses that are embraced quickly by government agencies," he adds.

An alternative payment system can help governments control costs associated with conventional payment methods such as credit cards and checks.

 "When the government is processing billions and trillions of dollars in transactions, a small savings will have a significant impact," Lampe says. Checks "are not the most efficient mode to move money in the 21st century," says Lampe.

Dwolla charges 25 cents per transaction over $10 while transactions under $10 are free.

The Department of Revenue is the first bureau to integrate with Dwolla. It allows merchants to pay their cigarette stamp taxes via Dwolla. Merchants using Dwolla to pay the tax can receive cigarette stamps three or four days quicker than merchants who pay by check, Lampe says.

Once the government receives funds through Dwolla, it can withdraw funds through the banking system or move money to and from different accounts, possibly separated by departments or into one central fund that issues refunds, says Lampe.

"How can we marry government and innovation?" Bousselot says. "Dwolla makes sense not only from a cost perspective but also because it's the way people are interacting today." 

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