Nalini Muppala

Analysis, observations, perspectives on mobile space


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Square payments is a disruptive innovation. Square started as a new market disruption by enabling people who until then could not accept credit/debit card payments, to do so from the convenience of a smartphone or an iPad. As expected, according to theory of disruptive innovation, there was no response from the incumbents.

Again in line with disruptive innovation theory, as incumbents are expected to, Square moved up market with its Register app that turns an iPad into a register. Register is also a low cost disruption. It is much cheaper to get started with a Square App on a iOS device than to install a traditional “cash” register. Incumbents will start feeling the pressure now.

A primary advantage that Square has over traditional can registers is that it is a software solution. Product enhancements are cheap and easy for the merchant. It rides on the mobile device boom. Imagine the possibilities for the passenger in a Taxi cab fitted with a iPad for Square Register, news updates: news updates, email, … endless.

I think Square activity will be a barometer of the economy. It will be a window into consumer behavior similar to FedEx shipment trends, payroll churn data from ADP. Such insight in its raw form might not be of commercial value to Square. Remember Mint? Mint provided a convenient way to gather credit cards, loans, banking accounts, and stock trading accounts in one place to get a complete picture of one’s finances. Mint was able to gather some insight into consumer behavior. However, Mint failed to create a thriving business model to leverage such insight, and was acquired by Intuit. continues to pitch credit card, loan offers that could lead to savings. the pitches are customized based on user activity (annual fee on a credit card, APR, etc.,). However the revenue from providing customer leads was clearly not big. As @asymco says, Square is sitting on a mountain of valuable data. I suspect they will find a way to leverage it and thrill users with better experiences, even if not monetize it directly. Yes, the age of Big Data.

There has been much talk about NFC for payments. NFC requires more change in user habits than the solution pioneered by Square. With Square, people continue to use their credit cards and pay their bills at the end of the month as they always did. Merchants need not retool to accept NFC payments; Square builds on the millions of mobile devices in merchants’ and consumers’ hands. But this leads us to what is missing in Square.

An element of disruption is missing in the way Square works now. Square accepts traditional credit cards and debit  cards as the only mode of payment. The value chain still includes payment clearance houses which presumably take a cut of the 2.75% processing fee that Square charges for every transaction.

I suspect Square is working on a means to eliminate payment processing houses from the value chain. Preloading user account with money is the quickest; direct debit from a bank account might be easy; mimicking credit card functionality is the toughest: there is a lot of risk in providing credit to user and ask to be paid later. Given the prevalence of credit card usage, Square would have to live with payment clearance houses until it cracks the hard one. No wonder then Visa is one of the early stage investors in Square. Linking a checking account to Square might be the best in the short term.

There will be copy cats and the first one is Paypal Here. Again, this includes payment clearance houses. For now, Paypal’s advantages seem minimal: a slightly smaller processing fee at 2.7% (vs Square’s 2.75%), same day availability of funds in merchant’s paypal account (vs Square’s next day to merchant’s checking account). Paypal is limited to Paypal users, Square is open to anyone using a smartphone and a credit card.

Competition is not standing still. The opportunity in mobile payments is big and everyone would love to have  a piece of it. Just one example: Mobile network operators are hard at work via Isis. MNOs have been seeing less love these days though.

Square is promising.

Image source: NYT bits blog

Written by Nalini Kumar Muppala

March 18, 2012 at 8:21 am

Posted in Theory

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