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!