Square: Connectivating payments

For decades, small business owners and individuals offering professional services could be paid in cash (or check) only.  This was because accepting credit card payments was complicated—it required setting up a merchant account and going through many hoops that were unfeasible for a taxi driver, a musician or tutor.   Jack Dorsey, co-founder of Twitter, set out to build a company that solved this problem: Square.  By plugging a thumb-sized credit card reader into the earphone jack of their smart phone, anybody can now accept credit card payments, paying only a flat rate of 2.75% on each transaction.  Square’s service is fast and simple: no expensive equipment, no extensive sign-up process, no complicated approval procedure, no hidden extra “per month” or “per transaction” fees.

Square has grown tremendously since its launch in 2010.  It now processes USD $8 billion of transaction per day, and was recently valued in a fourth round of funding at USD $3.25 billion.  We featured Square in our book “Conectivate!  Companies innovating to be always available,” because it’s a great example of a company that was able to broaden its base by “connectivating.”   Square leveraged the increasing ubiquity of Internet-connected smartphones instead of building their own expensive, networked credit card readers.  This made it very inexpensive to scale to millions of users, helping them get ten times bigger, ten times faster, ten times cheaper. 

Square’s breakthrough innovation was fueled by the need for security and convenience: in an economy dominated by plastic payments, small-scale providers of services and goods had felt the pain of lost business too many times when the customer asked “Can I pay with a credit card?”  They were eager to appear bigger than they really were—to say “Of course we take credit cards!” and Square showed up to fill that void. 

Square has been able to lock-in customers through convenience and low-cost—it’s so easy and inexpensive to set up and maintain, that it’s not worth switching to alternative solutions.  This might change as deep-pocketed companies like Google, VeriFone and Intuit start competing in this market, and innovative companies like LevelUp redefine consumer payments in certain segments like the restaurant industry.  But for now, Square is maintaining its lead, and innovating beyond credit-card swiping to phone-to-phone payments—a wave that Starbucks is hoping to ride with its recent $25M investment in Square. 

Square will need to continue “connectivating” to maintain its high valuation.  While it’s already done a great job at broadening its user base and enabling trusted transactions, it could explore opportunities to innovate in other “Connectivate!” categories.  This could include building an effective ecosystem that provides network effects to payers and payees that prevent them from jumping ship to another payment provider—think of what companies like Yelp, TripAdvisor and BillGuard have done to make people feel more confident about decisions they make, and to feel protected when transacting with unknown entities—Square could think of other human needs it could meet by building a community of users that are engaged with each other.  Square could also simplify the search for product and service providers, the way LevelUp simplifies search for restaurants near you and Angie’s List simplifies search for the very providers that might already be accepting Square payments.

We look forward to seeing what Square does in the next few years, and hopefully, they will be able to learn as much from other “Connectivating” companies as we have learned from them.