This post is a translation of an article published in French in Revue Banque
In a couple of quarters, Square has succeeded in rushing into the scene of payments, when it took even PayPal several years to achieve a similar presence. Thanks to a perfectly calibrated offer, this new entrant has managed to unveil and acquire in the US a segment of the market that was unidentified by traditional actors.
Square a dashing progression on the American market
Square (https://squareup.com) is a startup launched in 2010 in the US by Jack Dorsey, one of the co-founders of Twitter, following the failure of one of his friends to sell a good for $2000 because he could not accept a payment by credit card.
Square allows the cashing of a payment by credit card on a general purpose device like an iPhone or an Android smartphone, an iPod touch or an iPad tablet, thanks to a freely distributed widget capable of reading the magnetic stripe of a card and a freely downloadable application.
Square subsequently launched in May 2011 a complete Point-of-Sale (POS) application that can print paper receipts, interface with a cash drawer and process refunds; coupled with that merchant’s application, Square launched Card Case, a digital wallet linking transactions to a regular bank card that lets customers pay only by providing their names.
Square has definitely experienced a very strong growth since its launch:
Number of merchants:
|May 2011||Dec 2011|
|500 000||1 million|
Volume of transactions:
|March 2011||July 2011||Nov 2011|
|1 million $/dayr||4 millions $/day||11 millions $/day (soit 3 milliards $/year)|
Square has benefited for its expansion, first from the distribution by Apple (April 2011), then by more traditional retailers (Best Buy, Radio Shack, Target and Wal-Mart) (9,000 shops in October 2011), and lately by T-Mobile, for its enterprise customers (December 2011).
This formidable success is reflected in successive successful funding rounds, the last one consisting of $100 millions (June 2011) based on a value of more than $1 billion for the company.
Square reveals an un-served market in all the developed countries
In the US, there are approximately 8 million merchants equipped with credit card terminals. By comparison, Square on-boarded 1 million new merchants in less than a year; it is definitely a very significant achievement to put to its credit. Square estimates it has a potential market of 26 million “non-traditional” merchants, who have no solution for currently accepting credit cards.
These merchants would benefit from the possibility of accepting credit card payments, but they can’t currently do so because:
- They do not meet the qualification criteria imposed by banks (most notably concerning the minimal volume of monthly transactions)
- And When they meet the criteria, the cost of the solution (renting of the terminal, setup, monthly subscription) do not always match the actual revenue generated from credit card payments
Netbanker has computed that an typical merchant using Square processes a average $70 transaction every 5-6 days. This represents a threshold much lower than the one necessary to benefit from the typical use of a credit card terminal.
These merchants are freelance people, street vendors, repairmen, or Girl Scouts selling cookies. Square revealed in the US a huge blind spot in the sight of banks. This same segment is actually completely open in all the developed countries.
Square has in fact not introduced a technological innovation. Its device reads the magnetic stripe of credit cards because it’s the most common way to read a card in the US, but it could perfectly read a chip. Similar devices have already appeared in Europe to let a smartphone process a bank card (iZettle, Cellfony).
Square has introduced a more fundamental innovation by allowing the processing of payment cards on widely distributed products designed for the general public. And it has offered a very simple to use integrated solution that masks and handles the actual complexity of the payment eco-system. Furthermore, the solution is offered with a simple and easy to understand pricing model.
Square frees their users (the merchants) from all the complex administrative tasks linked to the processing of credit cards by playing the role of a merchant payment processor, and it relies on the technical infrastructure of Chase Paymentech and acquisition capacity of a bank, JP Morgan Chase, to process the payment transactions. Square is providing a gateway to let merchants access the standard settlement system, with the level of control required by this system.
A very simple model for the merchant and a very aggressive pricing model
What is the most striking point in Square’s model is its extreme simplicity from a commercial standpoint. A unique transaction fee of 2.75% in swipe mode (3.5% plus 15 cents when card number is entered manually), free distribution of a dongle and free downloading of an iPhone or iPad application, no pre-required subscription fee. It’s obvious that the pricing model is markedly different from the other card acquisition solutions. Once their individual or commercial identity details have been provided, customers are instantly operational and can use, or not, the Square system as they see fit.
It has been said that Jack Dorsey, who had no previous experience in the financial world, was stunned by the complexity of banking processes when he started developing his solution. It should be acknowledged that he has succeeded, by assembling the right competencies around him, to deliver an offer meeting all the technical and legal constraints, but which does meet his original vision: Providing an extremely easy to use solution for an individual, like his friend James McKelvey, to never miss a sale when facing a buyer who only has a credit card in his pocket.
On top of this ease of use, it must be emphasized that Square’s pricing model is very aggressive. With a transaction fee of 2.75%, Square proposes to individuals a very competitive pricing for small merchants processing less than $5,000 of transactions per month; and a roll out without any heavy registration controls, setup or subscription costs.
With a margin estimated around 0.3%, it’s likely that Square does not see this pricing as the heart of its business model. This can be seen as an aggressive go-to-market strategy targeting a very fast acquisition of a large user base, in order to attain quickly a break even point, which always corresponds to very high volumes in the payment world.
Square shows the coming reconfiguration on the point of sale
The reactions of the incumbents of the merchant processing market, like First Data, show the disruptive aspect of Square’s strategy. Its competitors pretend, like they always do in that cases, that Square has technical issues, like data encryption, that the solution is interesting “only” to occasional merchants and that in contrast only they offer complete solutions. This is a typical scenario in disruptive innovation: by conquering a fringe of the market that traditional vendors do not, and cannot, serve, Square is establishing a highly defensible position allowing subsequently a timely assault on incumbents’ segments.
Actually, Square presages a technological disruption on the point of sale. By leveraging widely distributed devices like iPhones or iPads, Square demonstrates how the capture of a transactions can now be done on non-proprietary material, that has a low cost and is very versatile. Based on the capacity of processing of these devices, the possibilities of complementary services, like the management of fidelity programs, promotional sales or recommendation campaign, are a natural path to marry the improvement of customers’ experience on the point of sale and the seamlessness of the payment transaction. Furthermore, just like what Apple is already doing in its own shops, thanks to a tool like an iPad which can helps for the selling process, it is no longer necessary to ask the customer to move to a central cashier and the transaction can be closed on the spot thanks to a light solution.
Square signals the beginning in a new race
Square has already attracted several competitors in the US like Intuit with their GoPayment and North American Bancard with Pay Anywhere. But Square still continues growing at an incredible rate and signs more and more partnerships for its distribution.
The question for Europeans is no longer if they need to replicate the model, but who will be able, like Square did for the US, to offer a solution perfectly adapted to this new segment with the technical and regulatory environment that exists in Europe, and this in a very short future.