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Innovation in Financial Services

Innovation in Financial Services

A discussion of trends in innovation management within financial institutions, and the key processes, technology and cultural shifts driving innovation.

Payments start from Square one

11 January 2010  |  3378 views  |  1

In the 1998 movie “half baked”, the main characters sell weed to various buyers to get their friend out of jail. Not the most sophisticated movie, if I may say so, but decently funny. While they’re selling, you hear a voice over by the main character Thurgood Jenkins (Dave Chapelle) telling about the type of people you meet. One of them is the “enhancement smoker”, the one that thinks every deed is better done “on weed”. It boils down to quotes like:  

Enhancement Smoker: "Did you ever see Scent of a Woman?"

Scarface: "Yup."

Enhancement Smoker: "You ever seen Scent of a Woman... on weed? That's the way to see it. It's just wacked." (yeah, I know)

Let me tell you something: people in the valley are enhancement “smokers” too. Only they’re not using weed (or they might. I’m not judging). They’re hooked on the iPhone (and the “app economy”). Hey man, did you ever play console games? Ever did that… on the iPhone? Ever acquire a payment on from a credit card? Ever done that… on the iPhone? Seriously, guys, smart phones are cool, but international market adoption is still slower than one would imagine looking at the hype around the iPhone. Not that it won’t succeed – it will, but it will definitely take more time, and personally, if I had to bet on apps vs. mobile web, I would bet on the latter (late addition: see Giff Constable's post about the app store, especially the first few paragraphs). See my (future) mobile #3 post on technology and risk for more thoughts.

What Square is, and what it isn’t

Don’t get me wrong: the new Square gadget on the iPhone is cool. How cool? Way cool, not only because it’s a smart idea but also because they managed to pull it off in such short time. Kudos. It’s going to allow people who always planned to charge cards to start doing so – seemingly very comfortably and quickly; in developed countries, where credit card and smart phone penetration is high, Square has the potential to become a smashing hit. But among all the crazy positive coverage and superlatives it is getting, I’d like to keep a few things in proportion.

The whole iPhone issue is first. I find it hard to be too enthusiastic about something that gets traction by being bound to a specific hardware platform, with all due respect to the number of the founder’s friends who own it. As Om Malik rightly points out, and I’ve noted in a previous post about mobile, porting isn’t an easy task. So breaking out of the look-I’m-cool-with-the-iPhone pattern and becoming widely compatible is one thing Square is going to need to respond to quickly – a doable task, that I think they are now looking into. But there’s more.

Why do payment services disrupt and succeed? Three reasons, in my humble opinion. One: they have a compellingly easier mechanism for doing something that was previously hard. Big check on that for Square (just solve that porting issue). Two: they create payment volume that wouldn’t have happened otherwise. Three: they instill trust between buyer and seller. New payment volume has a big question mark on it, and trust seems to be severely lacking, at least as of now; let’s look at the two, and understand what the two main issues are that Square needs to look at to be really successful.

The question of new volume and value

Judging by its own press coverage and tweets, Square is looking at the small business and occasional seller population. Here, you can create new volume in two ways: either convince occasional sellers (someone having a yard sale, for example) who use cash to move to cards, or let new sellers who wouldn’t get a standard merchant account acquire credit cards through your service.

Are they already acquiring payments from cards?

For the group that already has a merchant account and the acquiring relationship, Square is in competition with other POS terminal providers. Nice attempt, might actually work because iPhones are cheaper, not any new volume per se. Now, the “no fees no contracts” notion hints that Square doesn’t provide a merchant account or aggregation services, but I don’t know what does "attaching your Square device to a bank account" mean. If they don’t, plainly put, their business is limited. If they do, then great, we’re actually looking at a chance to create new volume.

There is, naturally, a big inherent risk here for Square, when they accept new merchants - letting someone use your system to acquire credit cards and holding you liable (because the acquiring relationship is on your name) is much more difficult and risky than you can imagine. In fact, it is easier to steal when you're a seller than when you're a buyer, by just defaulting on obligation – not sending products or not delivering services. I guess this is why their current on-boarding process takes a few days.

Will the ones with no merchant account start using Square?

So there are two groups to look at. The first includes sellers that want to add cards to their payment options, need a merchant account to sell but aren’t able to get one, and aren’t using an existing online service (like Paypal or others). Is this group big enough, and represents enough transaction volume? It might be. The second group is comprised of real occasional sellers. Are they ready to move to cards? Do they have an incentive to do so? Forget the IRS issues; aren’t you actually complicating their lives? And, is there enough business there? Hopefully for Square, there is, in both groups – and they can get them on board. Their value proposition for the first group is obvious (again, given that they provide the acquiring channel); for the second, it is much more vague. If there isn’t enough business there, what’s coming from them is merely a new, low cost terminal – one that I wouldn’t title “disruptive”, because it won’t create any previously non-existing payment volume, just have a substitution effect on payments that could have happened on a (arguably) more expensive platform.

What’s the issue with trust?

One of the main benefits of both offline and online marketplaces’ settings is that both sellers and buyers feel they can trust each other, because of the mediating presence of an organizing body. The same, in a sense, happens in a brick and mortar setting – the existence of a store implies that the owner has invested and is here to stay. This also related to the risk of getting new merchants on board – part of the trust issue is that buyers need to believe that sellers will deliver: send the product, sell them tomatoes they won’t get food poisoning from, etc. Using a portable card reader on a mobile phone does neither – it actually creates a setting that inherently feels unsafe, both for the seller and for the buyer. As a few people noted, even having to actually pass the terminal (=iPhone) between buyer and seller feels unsafe.

The above issue is true even before mentioning common risks: the ability to skim cards using a hacked iPhone and the unsecured cellular medium which allows for your details to be captured rather easily. And don’t even get me started about the ability to associate a picture with your credit card number. What kind of risk management is done on that option? I hope it’s sufficient, or else anyone can pretend to be any card owner, breaking the basic ability to verify face-to-card in card present settings (sure, sellers can still ask for an ID, but they whole idea is that they won’t). So basically, the way I see it, right now Square doesn’t give you that warm fuzzy feeling of trust you get when you buy at an established seller, the feeling that’s imperative for getting more transactions happening (again, more on wireless/mobile technology and risk in my next post on mobile payments). This might be a matter of market education, but I don’t see anyone who’s not a really early adopter using Square right now and feeling comfortable about it.

Bottom line – there’s a potential here, go get it!

Bottom line, I think it’s a great attempt, and if successful, will introduce a whole new level of cool to payment processing (we welcome all the cool we can get. We have none). I’ll definitely try this on my Blackberry whenever possible. But a disruptive new payment method? The PayPal of the physical world? Not just yet. There are trust and technology issues to be solved, and new real value to be created, and a few key issues to be ironed out and communicated about (all, as I have discussed above, potentially solvable and doable). People’s money is not to be taken lightly. Once these are dealt with, we should see a real new market thanks to Square (and obviously, the option to disrupt the POS and wireless POS market is always there). Until then, it will remain on a very limited playing ground.

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Comments: (2)

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune | 12 January, 2010, 08:53

SQUARE mitigates the risk of loss of sale when the seller is unable to accept a credit card. It is assumed that the buyer anyway trusts the seller enough to buy. SQUARE merely facilitates the transaction by enabling the seller to accept a credit card, which wouldn't be possible without SQUARE.  So, I'm not sure if the issue of buyer-seller trust comes in the way of adoption of SQUARE. Only time will tell if the size of the market that SQUARE seeks to facilitate in this manner is big or small.

As regards availability, SQUARE might have launched only on the iPhone but its card reader device works on the audio jack which is available on Nokia, Samsung and most other handsets - even of the non smartphone variety. I think the SQUARE promotional material makes a specific mention of this.

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A Finextra member
A Finextra member | 12 January, 2010, 15:09

Agree, but as I noted, if the case is that Square enables CC where every challenge is assumed as solved (trust, merchant account etc), they are competing with wireless POS devices and not creating a new market.

As for portability - the device can be connected, but the actual software is also an issue. Porting between devices is not an easy task.

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