In 2015, Will Credit Cards and Banks Cash In on Black Friday?

There's a quiet revolution taking place among payment services; and if you're not looking, you'll miss the fact that it's sprouting in -- of all areas -- Des Moines, Iowa.

By the time you're done reading, you, too, may think it's possible that credit card companies will be facing serious competition by the time Nov. 27, 2015 (Black Friday) rolls around.

A telling example
Before getting to the revolutionary technology I want to tell you about, let's do a quick primer on how credit card and other payment systems work: You go to a website, you pick out a new TV for $1,000, you pay for it with your credit or debit card, the TV is delivered to you.

Later, of course, you'll pay off your credit card, but I want to focus on what the vendor (say, Best Buy) gets. Different credit card companies demand different percentages of a purchase in return for the convenience of the cards' use. The chart below shows the maximum amount the credit card companies and banks receive -- and the amount vendors have to pay -- on purchases of different amounts.

Source: MasterCard and Visa Interchange Reimbursement Fees literature.

Of course, I would love to tell you how much is charged by other credit card providers, like American Express and Discover. But their structure is different, and it allows them to determine rates on a case-by-case basis.

And lest we forget, the banks that distribute these credit cards -- namely the Big Four Banks of Citigroup (NYS: C) , JPMorgan Chase, Wells Fargo (NYS: WFC) , and Bank of America (NYS: BAC) -- get a big piece of the action from all that money moving around as well.

Goliaths, meet your David: Dwolla.
Thus enters our hero, Dwolla -- the brainchild of 28-year-old Iowan Ben Milne. Milne once owned an audio company and became obsessed with all the fees he was paying to banks and credit card companies. Much like Netflix's Reed Hastings thought when he was burned by a late fee at Blockbuster, Milne thought to himself, "There's got to be a better way."

With the help of some well-positioned investors, Milne is creating that "better way." Unlike PayPal or Square, which are built on top of existing financial networks, Dwolla is creating an entirely different -- albeit small and new -- network.

Two of his biggest investors are financial institutions: The Members Booth and Verthian Credit Union -- the latter of which is essentially a bank for the John Deere Co. (NYS: DE) . Normally, a bank might not be willing to offer such user-to-user plans, as it might cut into their profits. But Verthian, a credit union with a charter as a non-profit, was all ears. In reality, the service works much like PayPal, with an online account that has direct access to one's bank account and can send money to anyone, anywhere.

Business has ramped all the way up to the point where Milne and his 12-person staff are processing between $30 million and $50 million in transactions per month. A total of 16 banks are now using Dwolla, and Milne promises that even bigger things will be coming starting this December.

Here's the real kicker, taking the example from above, this is what payouts from merchants would look like using Dwolla:

That's right, all transactions take place for the uber-low fee of a quarter!

If Dwolla really takes off, and the banks and credit card companies don't radically change their tactics, the usual suspects could be stuck between a rock and a hard place: Some will jump ship and join Dwolla as they see it will inevitably become the payment method of choice, and others will stand pat while watching more and more merchants leave their network.

What's an investor to do?
The technology itself is still too young and the established powers too large for me to give a thumbs-down to all banks and credit card companies on my CAPS account. That being said, I'll be keeping a close eye on Dwolla.

And while I watch to see how that company performs, I'll also be following a company that'll prosper whether or not Dwolla eventually usurps credit cards. That's because the segment of near field communications (NFC) is just heating up, and would be used by any payment system to make transactions easier. The Motley Fool has put together a special free report -- Your Credit Card May Soon Be Worthless -- detailing one company that will benefit from the NFC movement. To find out the name of the company, get your report today, absolutely free!

At the time thisarticle was published Fool contributor Brian Stoffel is staying away from stores this Black Friday. He owns shares of Netflix. You can follow him on Twitter at @TMFStoffel.The Motley Fool owns shares of Bank of America, Wells Fargo, MasterCard, JPMorgan Chase, Best Buy, and Citigroup, and has created a covered strangle position on Wells Fargo. Motley Fool newsletter services have recommended buying shares of Netflix, Visa, and eBay, writing covered calls in Best Buy, and writing a covered strangle position in American Express. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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