Company Case: Square: In Relentless Pursuit of a More Elegant Payment Experience It happened one day at an art fair. Jim McKelvey, an artisan who worked in handblown glass, had an admirer of his work ready to buy a piece priced at $2,000. There was just one problem. The customer did not have that much cash, and Jim wasn’t equipped to take credit cards. McKelvey couldn’t close the deal and lost a valuable sale. But there’s a happy ending to this story. McKelvey quickly recognized that the problem he faced that day was common to small and medium-size businesses (SMBs) everywhere. Realizing how much money he was losing by not accepting credit cards got him going on solving the problem. McKelvey and partner Jack Dorsey came up with Square, the payment processing innovator that set fire to an industry. Today, Square is valued at $27 billion. So you might say that McKelvey’s glass art piece is the most valuable piece of glass never sold. Square’s origins are not unlike the origins of most start-up companies: The founders recognize a problem for which there is no current product or service solution and set out to solve it. The question is this: What created the problem that Jim McKelvey recognized that fateful day? The short answer: The consumer and marketing environment had changed, but businesses had yet to catch up. The World before Square When consumers used cash as the primary means of paying for goods and services, SMB owners had little problem selling their wares. But as the 1900s came to a close and more and more businesses accepted credit cards for payment, people carried less and less cash. This put SMBs at a disadvantage; many factors made the processing of credit cards difficult to impossible for them. For starters, before Square and its many imitators, it was illegal for non-registered merchants to accept credit card payments. Registering with an approved credit card–processing terminal provider was expensive, with a substantial flat fee at the start and transaction fees higher than most SMBs could afford. Credit card processing was available to merchants only on a contract basis—when merchants signed, they were locked in. Adding to this complexity, the terms of the contracts were difficult to understand, often leading to unexpected fees. If all this wasn’t enough to keep most SMBs out of the credit card loop, when it came to accepting credit and debit cards, they still had to be approved. Like getting a bank loan, being approved for credit processing services was contingent on indications of financial strength and stability. Then, “even if you do get accepted by a traditional terminal provider to accept payments, you typically sign up for a contract that is at best opaque and probably not so fair,” says Square’s head of hardware. “There’s a teaser rate, there are monthly fees, there’s a variety of other fees, different cards cost different amounts.” Things started to change in the mid-1990s with the advent of e-commerce. As unlikely as it seems today, in the early days of eBay, buyers had to mail cash or a check to sellers before goods Page 2 of 4 were shipped. Online payment processors like PayPal took care of that problem. But in the offline world, SMBs were still being excluded. The Dongle That Changed Everything Square launched in 2009. The idea was simple. Square would play the role of a big business, putting up the capital and assuming the risks of processing credit and debit card transactions. The promise of volume let Square form partnerships with credit card companies such as Visa and Mastercard, bypassing the credit card–processing companies altogether and negotiating lower fees. With low fees and minimal overhead, Square could make its services available to anyone— merchant or everyday individual—with no contract and no approval process. Merchants gained piece of mind from a simple structure of affordable transactions fees that were the same for all. With the back-office part of payment processing sorted out, Square needed only to figure out the interface between the merchant and the customer. It developed the now-familiar Square dongle—a small yet elegant white plastic magstripe reader that plugged into the headphone port of Android or Apple iOs smartphones and tablets. The reader cost only $10 (free today), and the app that powered it was free. The combination of Square’s hardware and software processed unencrypted, analog card information by digitizing it and sending it to Square’s servers. Thus, with nothing more than a smartphone, any small business owner could accept credit and debit card payments, whether selling from a traditional brick-and-mortar store, a street cart, a booth at an event, or even the trunk of a car. Highlighting the real benefits of Square, Dorsey notes that payment processing is “not even in the category of things [merchants] want to think about. They want to think about things like hiring people and introducing new ingredients.” Once Square launched, its founders quickly realized that it offered only one solution to a very narrow problem. Credit card payment processing was now available to all. But a one-size-fits-all solution is rarely perfect for anyone. For most SMBs, running a card through a reader connected to a smartphone did not give customers an impression of stability and security. There also remained the challenge of appealing to the segment of SMBs that already had contracts with terminal providers. “The biggest thing [we were] competing with, honestly, was that sellers tend to develop systems of doing things and it’s the adage of ‘If it’s not broke, don’t fix it,’” says Dorsey. From its earliest days, Square’s founders realized that they were far from solving the problems associated with payments. And given how rapidly the forces of the marketing environment were changing, their task would never be done. To meet the challenges, Dorsey and McKelvey developed a philosophy of never-ending innovation with the goal of making payments less painful and more elegant. By their nature, payments represented a transaction barrier to both buyer and seller. To remove the payment transaction barriers entirely, payments had to become perfectly seamless. And to fully accomplish that goal, Square would likely have to venture beyond the payment business. Page 3 of 4 Continuous Innovation Following the original dongle, Square unleashed a string of products and services that rival the best of Silicon Valley for frequency and quality. Not only has Square partnered with Apple for various projects, references are often made to the “Apple-esque” design qualities of Square’s hardware and software developments. Although the basic Square dongle is still available today, the device is the entry level and least sophisticated of Square’s products. Consider the following: Square Stand (2013). The Square Stand turned the Apple iPad into a more complete point-ofsale system. The integrated all-white stand sits on a merchant’s countertop and serves as a customizable “register,” letting employees ring up orders. Once the bill is finalized, Square Stand rotates to face customers, allowing them to swipe or insert their own card and sign on the touchscreen. Today, Square Stand has evolved to interface with commonly used peripherals such as printers, cash drawers, bar code scanners, and even Square’s own Bluetooth Reader. Square Bluetooth Reader (2015). Connecting to other Square devices via Bluetooth, the screenless Square Reader is a versatile device that reads chip-embedded cards as well as contactless forms of payment such as Apple Pay and Google Pay. The device can sit in an angled stand on a counter or can be handed to a customer to accept payment in almost any situation. Square Register (2017). Despite the versatility of Square’s many products, there were still customer transaction situations that were not yet “seamless.” Enter Square Register—a standalone point-of-sale system designed and produced by Square. A stand holds the 13-inch anodized aluminum tablet that faces the employee. A second, smaller touchscreen faces the customer, either attached to the back of the stand or separate for situations where the customer is a bit removed from the register. Square Register interfaces with cards via magstripe or chip and also accepts contactless forms of payment. Like Stand, Register interfaces with a variety of peripherals. Register saves money and time by not requiring an Apple iPad. But more important, Square developed Register to meet the needs of larger businesses that found Square’s other products to be problematic. For example, iPads have to be updated frequently. For chains with multiple checkout lanes in multiple stores, updating each iPad in the company became a full-time job. Register solves this and other problems with a tablet that is stripped down in both hardware (for example, no battery) and software (only Square software). The result is a system that is faster, more powerful, and more reliable. Square Terminal (2018). This is Square’s all-in-one payment terminal. Like Register, the device is designed and produced by Square so that it doesn’t rely on any additional hardware or software. It can stand alone or interface with other Square products. With a screen the size of a modern smartphone, Terminal accepts all forms of payment accepted by other Square products. Its touchscreen lets customers see and sign for their bill. And Terminal can also print receipts. Square Terminal is Square’s way of filling a niche that existed between its other products. More important, it seeks to fix “all the stuff” that’s wrong with traditional credit card terminals. Square executives quickly point out the antiquity of standard terminals that still dominate the retail landscape, put in place by traditional payment processing companies such as Ingenico and First Page 4 of 4 Data. These devices have many issues that businesses and customers have just come to accept. For example, the keypad is small and clunky, resembling a handheld calculator of 40 years ago. The screens are tiny and do not let customers examine their complete bill. The older devices are also difficult to update with new capabilities, often requiring an entirely new hardware interface. Beyond Exciting Hardware Square designed each of its products with certain applications in mind. But the company’s approach to innovation rests on the expectation that customers will apply its products in ways the company never imagined. “What’s exciting to me about it is that it kind of resonates back to when we first started the company and we built the reader,” explains Dorsey, referring to Terminal. “We had some idea of who would use it, but really no idea how it would end up being used. This has very similar properties where we’ll probably be surprised at how people use it.” Once merchants get their hands on a Square device, they instinctively figure out how to make it work for them. While Square expected Terminal to be employed by everyone from “dentists to bowling alleys,” it couldn’t have imagined all the ways the product would be used. For example, field tests revealed that waitstaff in restaurants tote Terminal to diners’ tables for on-the-spot payment. Salon operators hand Terminal to customers while they are still in the chair. In perhaps one of the most unexpected uses, a plastic surgeon began taking Terminal to the treatment room so that the bill could be reviewed with the patient and payment could be made in private, avoiding potential uncomfortable situations. The Square universe also extends far beyond in-person payment processing. Square is invading PayPal’s territory with online payment capabilities. It’s Venmo-like Square Cash lets individuals send money to each other with the ease of an app. More important to SMBs, Square provides a full portfolio of business services, including creating and hosting online store platforms, omnichannel integration, payroll processing, loans, appointment scheduling, and much more. Thus, Terminal, Register, and Stand aren’t just exciting pieces of hardware. They are gateways to an entire ecosystem of small-business essentials. There’s no question that Square has deeply disrupted the credit card payment establishment. Square’s revenues have nearly tripled in the past three years to $3.3 billion. It also handled $84.66 billion in transaction payments—impressive but still a drop in the bucket when you consider that Square’s potential market is “all transactions, online and off.” More important is the potential of Square’s portfolio. “Our approach has been to not just stop at the device, but the connection to the broader ecosystem of tools,” says Dorsey. “We can handle your payroll, we can give you a loan, we can handle your appointments if you’re a salon, in addition to walk-ins who come in to buy product and use [Terminal] to swipe a card. If we can tell a story that is bigger than one piece of hardware that is visible, then we tend to shift minds.” In other words, Square’s potential for growth is practically unlimited.