Square… It’s Déjà Vu All Over Again!

by Russ Jones on December 14, 2011

in Disruptive Innovation, Innovation, Merchant Acquirers, Merchants, PayPal, Russ Jones, Square

Russ Jones - Glenbrook Partners

How does disruption happen in mature industries?

Clayton Christensen famously wrote about this phenomenon in his classic book “The Innovator’s Dilemma.” Most commonly, the new disruptor enters from below – by providing new capabilities to those unserved by the incumbent providers. Rather, incumbents stay focused on their best customers – and dismiss opportunities to serve the unserved. After all, how profitable could those tiny unserved customers actually be? “They’re just not worth bothering with” is the classic incumbent response. So it goes.

We’re in the midst of another disruption cycle on the acquiring side of the card payments business in the US. You can almost feel it happening. And, if you’re paying close attention to the data, you can see it happening. If you’re not – if you’re into incumbent thinking – you’re not seeing what’s happening. So it goes, indeed.

Leading this new disruption is Square as they’re democratizing card payments acceptance on the new mobile platforms – and doing so with a beautiful design esthetic.

PayPal did something similar a decade ago by enabling you and me to accept card payments online as we were selling stuff (our prized possessions!) on eBay. By enabling us to create a seller’s account in less than five minutes, we could avoid the stiff underwriting criteria that incumbent merchant acquirers traditionally imposed on us.

PayPal just accepted us – and then figured out to manage the risk associated with any bad actors among us. When you applied for a PayPal account, they said “Welcome seller!”, and then let us prove we were trustworthy. They flipped the incumbent mindset completely upside down. It’s a thing of beauty looking back on it.

And the incumbents just dismissed it, not thinking it would amount to anything – just a gnat on the payments landscape. Who cares about serving folks like you and me – after all? In case you missed it, PayPal is today processing over $100 billion a year in purchase volume, and now generates over $1 billion a quarter in revenue. The gnat grew up.

Square is applying a similar strategy to physical POS merchants. At the same time they are applying the scope advantage that today’s mobile devices provide. They have eliminated the requirement for special, purpose-built POS hardware to accept simple card-based payments. And, they’re not alone as Intuit and a few others are also pursuing this new opportunity for market expansion.

Similar to PayPal’s early days, Square is accelerating its growth as it adds more users. In early 2011 Square was processing $1 million a day in purchase volume, then $2 million a day, then $4 million a day and, in mid-October, announced it was processing at a $2 billion annual run rate. In mid-November – thirteen months since launch, Square announced it had an $11 million day.

Way back in the day – thirteen months after launch – PayPal was processing $6 million a day. Hmm. Something’s going on. Almost feels like Square is “pushing on an open door” – doesn’t it?

Every month or so the Square “app” gets better features – new receipt capabilities, new loyalty features, etc. And the user base has continued to grow. But unlike PayPal users, which are a combination of mostly buyers and a smaller number of sellers, almost all of Square’s users are sellers! So, where are the rest of the incumbent merchant acquirers you might ask?

Yesterday, Square announced that it now has over 1 million sellers. I’m not sure I want to call them all “merchants” with that term’s heavyweight connotations. But they are sellers, for sure, and they are starting to generate some interesting incremental payment volume. They just want to get paid – using cards – for what they deliver. It’s simple, isn’t it? “Just let me do it,” they say! And don’t bother me with some endlessly complicated fee schedule – just make that simple too.

Many are part of the long tail of 20 million plus sole proprietors that make up the bulk of the small businesses in the United States. But it is more than just businesses; there are also individuals raising funds for the PTA and other good causes. Folks like you and me – without other options.

Isn’t this all déjà vu all over again? In a way, it’s kind of amazing that it’s taken another decade to relearn this lesson – that acceptance of cards is something many of us need – not just “merchants” with physical storefronts, balance sheets, and acquirers who are willing to take a risk on us.

Square has also uniquely turned payment acceptance into an everyday off-the-shelf product. And we all know how much Americans love their products. I can go into the Apple Store, Best Buy, Wal-Mart, or any number of retail outlets on the way home and get everything I need to start accepting card payments tomorrow morning. No more site visits, no lengthy application, no more wet-ink contracts, no more multi-week underwriting process.

Square’s emphasis on design adds another dimension to their differentiation. I’ve had several friends email me copies of the email receipts they’ve received from Square purchases – clear evidence of both disrupting and innovating in a new arena. Other friends are telling me how they love Square’s new Card Case – allowing them to pay at merchants they frequent regularly without even pulling their phone out of their pocket.

As a student of payments innovation, I just love this stuff. How about you? Share your thoughts in the comments!

12 Responses to “Square… It’s Déjà Vu All Over Again!”

  1. Jim Marous says:

    Barriers to participate low. Consumer understanding high. Ease of use amazing. Bank reaction nil. Why do I think I will be buying my cookies next year fro a Girl Scout with a smartphone and a Square device? No payment collection, easy tracking and definitely higher sales.

  2. KD says:

    Is square PCI compliant? I’ve heard it’s not…

    • Russ Jones says:

      That’s right. The Square App on a phone or tablet is not PCI compliant today. Since Square launched the app, Visa has clarified best practices for securing mobile payments acceptance — and Square has said publicly that it will comply with these best practices in a future update. Visa has also taken a small equity investment in Square, which many have interpreted as a vote of confidence in their model. – Russ

      • KD says:

        Interesting that Visa has a small equity stake in Square even though they’re not PCI compliant. I’m sure a lot of consumers whose cards have been swiped via square devices would be very concerned to know this device is not fully encrypting their mag stripe data. Furthermore, when is this “future” date? I’m thinking Square won’t need to worry about any fees for non-compliance from Visa…. But, if a breech were to occur it could be very complex and potentially large given the exponential increase in transaction volume which Square is currently experiencing. And – the cardholder has probably given out their email address too for their receipt.

  3. Jim Pravetz says:

    Seconding Jim Marous’s comments. Square’s iPad app is the first software in awhile that I’ve heard my non-techie wife rave about. She has her own skincare products startup (BotanicOrganic.com) and sells at events (Square) and online (Google Checkout). The iPad app is a mobile equivalent of Google Checkout, with a full shopping cart where you can pre-enter your products then just check them off at purchase time, have sales tax calculated for you, generate receipts, track inventory. Square even lets you use their “cash register” app for cash purchases. Seems like such an obvious product doesn’t it! Shortcomings: shopping cart is not in their Android cellphone version (can only enter final $ amount); why won’t Square allow a customer’s own sales data to be exported to small business finance software services like outright.com?

  4. David Bellinger says:

    I agree that PayPal and Square share interesting parallels but I draw a different conclusion. A lot of PayPal’s success resulted from adoption of the merchant acquiring business model, which really took off when they bought a payment gateway to process card payments. In my view their fundamental success derives from their focus on a specific segment–i.e. internet (and now mobile) merchants. They also got very good at identifying and managing fraud, which is the key to running any successful payments business. Square’s success IMHO derives from their focus on another underserved segment–essentially the small and mom & pop businesses that the acquiring industry has been loathe to serve. They also appear to be good marketers, obviously being very adept at leveraging social marketing. Assuming Square has figured out how to identify and manage fraud like PayPal, they may prove to be just as successful as PayPal over time.

    • Russ Jones says:

      PayPal and Square both use the “master merchant” model for onboarding sub-merchants and facilitating their transactions. While PayPal did acquire a payment gateway (PayFlow) this is a minor part of their business — so minor that the gateway transaction revenue (not merchant acquiring revenue) is reported as “other” in their financial statements. The $100 billion plus in purchase volume for 2011 is all being done with PayPal products and is unrelated to PayFlow. In my opinion, both companies entered the market by focusing on small sellers that were not being well served by merchant acquirers; PayPal in the online world and Square in the physical world. – Russ

      • David Bellinger says:

        FYI, I wasn’t referring to Payflow and when the VeriSign business was acquired it had double the volume of PayPal ($40B vs. $20B in 2004)–almost all was off-eBay, which was a key element of the acquisition.

  5. Robin says:

    Is Square experiencing sales/growth hurdles due to the non PCI compliance issue? It doesn’t appear so at this time. I would be interested to learn more about Visa’s stake in this company as well as when the “future” enhancements that adhere to Visa’s best practices would be effective.

  6. Juan Carlos says:

    A key point that definitively explains PayPal mass adoption was the merge with Ebay, once I read that the share of lion their payment transactions comes through this marketplace. Now although Square has already enrolled a million of stores, and this w/o dedicated sales force or big marketing campaigns, I tend to see Square pretty alone still needing a kind of “Ebay strike”.

  7. Alberto Mendoza says:

    Interesting what Square is producing in the US acquaring market, specially with the unatendet customers by traditional merchant service providers…. Do you think that those traditional merchants service provider might be succesfull if they adopt a similar scheme and offer more competitive merchant discount rates?

    Does Master Mercahnt business model is an important reason in the Square success model, what are the main features of that model?

    Regards from México, Alberto.

  8. Joel Fritchman says:

    If needing a POS system, consider SalesVu (www.salesvu.com). We use it for our coffee shop and it is great. Intuit doesn’t have much of any POS system (can’t track cash transactions) and Square doesn’t have the back-end reporting like SalesVu does. Plus, the POS has much better menu building options in it than Square. Another thing to consider is that Square has no phone support. Only email. That kind of stinks for something as important as your business.

Leave a Reply

Previous post:

Next post:

Clicky Web Analytics