(Corrects timing of eBay and Intuit product launches in 5th
* Small mobile payments attracting big players to sector
* Visa, PayPal, Wal-Mart, Google all elbowing into the game
* Square wants "every single businesses in the U.S." as a
By Gerry Shih
SAN FRANCISCO, Nov 12 Two years ago, employees
from the start-up Square Inc descended on farmers markets in San
Francisco to hand out a new type of credit-card reader that let
small, independent merchants accept plastic via their
smartphones or tablets.
But this month, when Starbucks Inc and Square
announced that 7,000 coffee shops across the country would begin
accepting payment through Square's smartphone app, the small
white cubes that were Square's original calling card didn't
merit a mention.
The subtle shift in Square's business focus, from card
readers to nifty software, comes as one of Silicon Valley's most
highly-touted startups encounters the brutal realities of the
arcane but lucrative electronic payments business.
Now on track to process $10 billion in payments a year,
Square has attracted a furious response from established or
deep-pocketed rivals who are determined to crush the San
Since Square launched, eBay Inc's PayPal and Intuit
have both released their own card readers, while retail
giants including Wal-Mart and Target have
announced a joint venture to develop their own mobile payment
offering. Visa Inc and AT&T also boast of their own
projects as does Google Inc, which continues to put muscle
behind its Google Wallet product.
Square must now show that it can compete not just for food
trucks and taxi drivers, but for large brick-and-mortar
businesses and chain stores too.
"Our path is to have every single business in the U.S. use
Square," said Keith Rabois, chief operating officer and a former
PayPal executive who heads Square's day-to-day operations. "It
won't happen tomorrow, but it will happen."
The bold talk belies the many hurdles facing the company,
which is valued at $3.5 billion by private investors. Square
makes money by taking a 2.75 percent cut for every transaction
it processes. But more than half of that is immediately paid out
to other companies, including the card's issuing bank, card
networks like Visa, and also JP Morgan Chase Paymentech,
which manages funds on Square's behalf.
With no cost advantage on the basic payment services, Square
is marketing itself to merchants primarily as a software
provider that can replace the bewildering array of
intermediaries in credit card networks. Its Square Register app
lets merchants take cards on an iPad, and also allows them to
design customizable menus and loyalty programs that can be
pushed out to customers' phones.
Meanwhile, Square is hoping that as more and more shoppers
download its consumer-facing Square Wallet app, they will begin
using it not only as their main means of paying for goods, but
also as a tool for finding nearby businesses and special deals,
and eventually eliminating physical credit cards altogether.
In the case of the Starbucks tie-up, tellingly, Square is
registered as the "agent of record" that processes Starbucks'
credit and debit card transactions, but the nuts-and-bolts of
fetching and depositing money in every sale is actually handled
by its partner, Chase Paymentech.
For Square, the Starbucks partnership was about encouraging
consumers to download its app, which lets users order and pay
for drinks on their smartphone.
PAYPAL SUITS UP
With five locations in Washington, D.C., Noah Dan, the owner
of Pitango Gelato, is the type of convert that has helped drive
Square's flat 2.75 percent rate was slightly better than his
existing credit-card payment deal, which came with monthly costs
and a dizzying, tiered fee-structure, Dan said.
Mostly, though, Dan was swayed by Square's free software and
the easily generated spreadsheets that tracked how many creamy
gianduja gelatos or fresh pomegranate sorbets he sold.
This March, Dan threw out his old card readers, purchased a
stack of iPads, and began using Square as his check-out register
at all five branches.
"I was always thinking, 'We have so much efficiency in
business but why does point-of-sale have to be so painfully
stupid?" Dan said. "Square was like answering a quick prayer."
But going after bigger businesses presents a different set
of challenges. Large retailers can negotiate their own credit
card processing fees, and pay much less than 2.75 percent. Plus,
they already have sophisticated sales-tracking software and
Rabois disputed that Square could not be competitive for
large retailers as it expands.
"I don't think our rates are actually higher; our rates are
more transparent," he said.
Because Square acts like an aggregator for its thousands of
merchants, Rabois added, Square will be able to negotiate better
rates with banks and credit card companies and improve its
margins. Square's daily transaction volume already makes it the
equivalent of the 20th largest retailer in the United States,
larger than, say, Trader Joe's or the Gap.
Perhaps its biggest rival is PayPal, which released its
"PayPal Here" card reader in March. PayPal likes to advertise
its per-transaction fee, which is 0.05 percent lower than
Square's, and says it already accepts payments at more than
7,000 physical locations in the United States, including Jamba
Juice and Abercrombie & Fitch stores.
PayPal, which came of age 10 years ago when it established
itself as a popular method of paying online, is already hooked
to bank accounts for its 117 million active users, said Hill
Ferguson, a PayPal vice president. Now, PayPal simply needs to
prod those users to use PayPal at physical store locations as
well, he said.
"We have a really good head start," Ferguson said. "Paypal
essentially created this category."
In recent weeks, payments industry analysts have also been
buzzing about Merchant Customer Exchange, a consortium of major
retailers, led by Wal-Mart and Target, that was formed in August
to develop mobile payment solutions.
As competition heats up, industry experts wonder how Square,
which has yet to hire a substantial sales force, will make its
pitch to millions of small and medium-sized businesses.
"Small business owners are tough to reach because they're
working in their stores all day, every day," said Logan LaHive,
the founder of Belly, a digital loyalty card service that has
been flooding the streets of U.S. cities with sales people.
DESIGN IS KING
Under CEO Jack Dorsey, who gained fame as the inventor of
Twitter, Square has adhered religiously to a design-first
philosophy that prizes simplicity and aesthetics. The powerful
undercurrent runs even to office decor: At the entrance to the
company's office, a security guard and a receptionist work on
plastic white Macbook laptops, a discontinued model that
nevertheless matches the office's monochromatic color scheme.
For small business owners, at least, the slickness of
Square's software design has proved to be alluring.
In Houston, Matt Jeffryes, who started Crescent Moon Coffee
with his mother, said salesmen from other card processors have
pitched him with better rates after he converted to Square, and
he has also seriously considered switching to PayPal Here. But
he stuck with Square because he found its software interface to
be useful and intuitive, and his customers paid him occasional
compliments on the payment method.
"If you look purely at the cost factor, they weren't very
competitive," Jeffryes said. "But having that whole package was
more important than saving a fraction of a cent in a
That allowed his mother to focus on what she was best at,
Jeffryes said: "Making a great cup of coffee."
(Reporting By Gerry Shih and Sarah McBride; Editing by Jonathan