A wall of investors' photos at Dwolla headquarters.

"Dwolla is trying to build an end run around the system," says Eric Weiss, a tech investor who has backed payment companies like Venmo and Braintree. "The problem with that is, as soon as people need to move their money back into the old system for any reason, you’re in big trouble, because all the same fees and wait times will apply." Users need to be able to pay merchants and transfer money to friends without ever leaving the Dwolla system. The network has to reach a large number of merchants and consumers before it’s valuable enough to exist in isolation from the traditional banking and credit system. "There is only one company who achieved that kind of scale to date, and that’s Paypal," says Weiss.

Last week, Dwolla took a big step towards expanding the utility of its network with the introduction of Dwolla Credit. Backed by billions from Comenity Capital Bank, the service allows Dwolla users to sign up for a virtual credit card that works just like traditional Visa or Mastercard, but doesn’t levy the same 2 to 3 percent fees on every transaction. Instead, Dwolla charges a flat rate: free for purchases under $10 and 25 cents for anything over that. Because Dwolla knows both the buyer and seller, users can apply for the line of credit and, if approved, start using it instantly. Depending on the customer’s credit rating their limit may be anywhere between $1,000 and $12,000.

Ideally, this would mean merchants using Dwolla could pass on the savings to their customers. In its home state of Iowa, for example, citizens can use Dwolla to pay their taxes or registration fees online, cutting costs from $5.45 down to just 40 cents. But so far no major merchants have begun to offer a similar deal.

"Dwolla is a fascinating company, because they are trying to build a whole new set of rails for moving money," says Mark Egerman, who ran the mobile payments division at the Consumer Financial Protection Bureau. "The ACH system is completely broken, and it's amazing to watch someone take that on." Working at the CFPB, Egerman saw firsthand how hard merchants were hit by the credit card system. "Restaurants were losing huge amounts of money and having to wait weeks to get their funds. Whoever can solve that problem will have a huge impact and a huge business"

But while Egerman is excited about Dwolla's mission, he remains skeptical about their chances. "In order for it to be really useful you need a ton of supply and demand. They are trying to build a two-sided market, and that is very tough, because you can't attract one without the other. It's a chicken and egg problem."

Ben Milne, Dwolla's founder and CEO, touted the instantaneous aspect of his company's new credit product. "Instead of waiting two to three days for the money to hit their account, it’s there the second someone makes a purchase." For a young business with tight cash flow, this could be huge. But once again, it’s constrained by the size of the network. Unless they can pay their expenses through the Dwolla network, the merchant will have to transfer that money back into their traditional bank, which tacks on the standard ACH waiting period. And Paypal offers merchants its own take on instantaneous payments through its branded debit card.

Dwolla says that more than 25,000 merchants, nonprofits, and government agencies are currently using its service. But at launch, Dwolla credit will only be accepted by a little over 40 merchants. In an effort to prevent fraud, the network will also be constrained on the consumer side. The product is rolling out in beta to a few hundred Dwolla users each day, and will slowly expand leading up to a public launch in the first quarter of 2014.

Milne says the slow rollout will allow Dwolla to work the kinks out of the system and help to prevent fraud, which was rampant during PayPal’s early days. According to Paypal founder Max Levchin, the company was earning $14 million in revenue by 2001, but was losing $10 million a month to fraudsters. "We know that you’re not going to walk into your local steakhouse tomorrow and pay for dinner with Dwolla," he admits. "But we feel like this is the next big step moving us forward from a service that’s interesting to armchair economists and to the average customer looking to save time and money."

Dwolla has raised $22 million in venture capital to date and likely keeps costs far lower than startups based in New York or San Francisco, where rents are extremely high. But it is facing off against a wide array of extremely well-funded companies like Square, PayPal, and even giants like Google, all of whom want to play in the payments market. Dwolla won’t confirm it’s current number of users, but will say it had 250,000 registered users at the end of 2012. Even if that number has doubled since then, Dwolla still trails well behind the 2 million people registered with Square and the 110 million Paypal accounts.

But the company’s investors aren’t worried. "Whenever you are creating a company that relies on a network effect, there is going to be a cold start problem," says Albert Wegner, the partner from Union Square Ventures. "But I prefer not to invest in thing where you need to get the timing right. We invested in Dwolla for the same reason we invested in Bitcoin, because we believe that in the long term, payments will need to become cheaper and faster, and we want to back the companies that will be part of the revolution, even if it takes a while to get there."