Last week’s announcement of Visa’s strategic investment in Square set off a wave of news reports and blog posts about its implications for Visa, Square and the rest of the ecosystem. Most of the discussion was focused on the how much Visa invested (they say it was in the “single millions of dollars”) and speculation as to Visa’s motivations for doing so (neat mobile technology). I think that perhaps the more interesting story is what this could mean to Square’s prospects in the long run, and more importantly, one of its major marketplace challengers (Intuit’s GoPayment) and small businesses more generally.
First, some context.
Square came out of nowhere in December 2009 with a tens of millions of dollars in funding and a [square] device that turned iPhones (or Droids) into mobile acceptance devices. But Square was a lot more than a small, white dongle that plugged into the top of the phone. It was a business model that enabled any small merchant to instantly obtain a merchant account and start accepting credit cards. For those of you who have ever had the pleasure of setting up a merchant account, that is a pretty big deal, especially for a teeny merchant with no prior history. It meant not having to find and then compare a myriad of options from hundreds of processors, each of which have their own 17-page questionnaire to complete and want you to personally pledge all of your earthly assets as collateral in exchange for getting a coveted MID (or merchant identification number). In some cases, processors even want to keep 50 percent of your sales in reserve until they decide you aren’t a shady operator.
We all know that there’s no such thing as a free lunch in payments (or anywhere). So not surprisingly, this instant merchant account came with its own set of strings (like very modest monthly account limits). But it began to transform the flea market vendor and street fair artist into efficient microbusinesses that no longer had to lose sales to people who didn’t have enough cash on hand to make those impulse purchases. In fact, the inspiration for Square came from one of its co-founders who was tired of losing sales of his high-end glass objects des arts to people who didn’t have enough cash to buy his stuff at his studio, said they would come back with more, but never did. Square launched with about 1,000 users enrolled in a pilot program, ranging from a band that was selling merchandise while on tour to someone running for local office that was using it to collect campaign contributions door to door.
On Friday, April 29, 2011, Square said that they broke the $2 million single-day transaction volume barrier (a month earlier they were at $1 million a day), earned $59,930 in revenue that day (which was up 40 percent from the same time the week prior) and ended the day with about 91,000 active users. This came on the heels of a deal with Apple earlier that month to sell Square in both Apple’s online and physical store locations (devices sell for $9.95, but customers get a free $10.00 credit on processing fees, so it is essentially free to customers)and the aforementioned “single digit millions” investment by Visa just a few days earlier.
[Not your typical start up, for sure. Let’s say that it helps to have as the other co-founder the guy who founded Twitter who also just recently had a six-page spread in Vanity Fair, Jack Dorsey.]
Intuit launched GoPayment just about two years ago in May of 2009 to solve a very different problem: aging receivables for small business customers, primarily those with fewer than 10 employees. It mashed up two important data points: (a) survey results that showed that 40 percent of their small business customers reported a rise in sales after accepting cards and (b) data that showed that, overall, small businesses had about $33 billion in backlogged payments from customers, who typically paid their bills by check. The tough economy was lengthening those payment cycles and wreaking havoc upon small business cash flow. Intuit thought that turning a mobile phone into a mobile point of sale device might help some of these businesses move payment closer to the point of service. GoPayment leveraged Intuit’s successful merchant processing business and created a solution targeted to its installed base of 4.5 million small businesses for whom the opportunity to move from paper-based payments to card-based payments was appropriate.
About a year later, GoPayment inked a deal with Mophie and launched a bundled “complete credit card solution” that was sold in Apple stores. It was a lot more expensive than Square’s dongle, but it came with a lot more stuff. The kit consisted of Mophie’s iPhone case with a credit card reader at the bottom, which transformed certain handsets into acceptance devices, and Intuit’s GoPayment app (which is integrated with Quickbooks), for $179.99 + a monthly and per transaction fee. At the start of 2011, Intuit launched a new version of its mobile reader, which works across mobile devices (iPhone, Droid, RIM) and the iPad. Card readers are now free, and the monthly fee has disappeared. There aren’t public numbers available for GoPayment, but a recent Intuit earnings release made reference to a spike in growth of 15 percent by its small business unit (7 percent in payments), which was reported to be, in part, attributable to GoPayment’s success. Fifteen percent (or even 7 percent) is pretty material to a company that reported revenues of nearly $900 million for the second quarter and which projects annual revenues for fiscal year 2011 to come in around $3.74 billion.
No, in the midst of all of this, VeriFone – a maker of traditional point of sale devices – Square-d off with Jack Dorsey, criticizing Square for its lack of security standards. VeriFone went to great lengths to make this point, launching a website, a YouTube recording of its famed CEO Doug Bergeron and even creating a mock-up iPhone app that showed how easy it was to use Square’s dongle to skim information off of a credit card. The storyline was rooted in Bergeron’s claim that since Square did not encrypt data, it was putting consumers at risk of being hacked and perpetuating massive fraud throughout the industry. Bergeron vehemently denies that he was pulling a Donald Trump, e.g. taking up a lot of airtime on one issue to pump up interest in another, in this case, to boost sales for his own products that compete with Square. Bergeron’s efforts unleashed a wave of responses from the industry, including two points of view what were published on PYMTNS.com (MagTek CEO’s Open Letter to the Payments Industry: Square vs. VeriFone and ROAM Data CEO Responds to VeriFone’s Open Letter about Square). It should be noted that ROAM Data provides readers to Intuit for its GoPayment product.
Now back to the story at hand – Visa’s investment in Square.
I think it is pretty obvious that the Visa/Square transaction wasn’t motivated by money – Square doesn’t need a “in the single millions of dollar investment” to keep the lights on – or control. This was a small investment made by Visa, just another one of the many that it routinely makes in interesting, new technologies. I think it was driven by two other things that, in this case, money obviously can buy: credibility and access for Square and a mobile hedging strategy for Visa.
From Square’s point of view, the credibility of having Visa’s name behind it is pretty material. Most people forget that Square has, in the past, received money from other big payments players, like Chase. But Visa is still the big dog in the payments pack. Their investment goes a long way to helping to, for example, deflect the concerns over the security issues and probably even a plan to pretty quickly to avert them. On the former, Square’s COO, all but confirmed that point in a press release that announced the strategic investment by Visa.
Access is where I think it could get very interesting. Access comes in two flavors: access to Visa’s network that could help facilitate a number of enhancements that could make the Square application more robust. But it is the access to Visa’s issuer network with the millions and millions of existing and potential small businesses as customers that I think is possibly more relevant for thinking about how this might play out. At the moment, Square is primarily targeting micro-merchants who need a quick and dirty solution for their businesses. This is in stark contrast to GoPayment, which is targeted to an entirely different group of businesses – ongoing establishments with mobile service or sales personnel who can now operate more efficiently using a mobile acceptance device that is also integrated with their Quickbooks accounting system and, in some cases, linked to Intuit’s small business payment network. Access to Visa’s issuer network could help diversify Square’s target market to (more stable?) small businesses that drive more transaction volume.
From Visa’s perspective, Square could be a pretty interesting hedge against NFC in the mobile space. Leveraging the power of IP-enabled mobile devices, like mobile phones and tablets, opens up a whole new set of possibilities for how this application could scale – not just for small businesses that need a card acceptance solution but for the customers they serve. One possibility is that Square could evolve to serve not just larger small field sales and service-type businesses, but small retail establishments (hair salons, restaurants, spas, boutiques) via an appliance strategy that sidesteps completely the need to rip and replace point of sale equipment in order to provide new value to customers beyond simply completing a transaction. In both situations, Square could leverage the magstripe technology that customers have in their leather wallets today to serve offers and create an electronic wallet, show outstanding balances/account history – all triggered by the swipe of a card and applications that live in the cloud. This could become an interesting experiment in driving the same kind of personalized business/customer experience that Google/Android is doing via NFC, all the while, creating a database of consumer and merchant account and transaction information that can also be monetized by both Square and Visa.
If past is prologue, it will take time for any of this to surface, if it ever does. Visa is a big company and big companies tend not to move quickly. But, Square is and has always been nimble. Since the amount of their investment wasn’t material enough to come with too many heavy duty governance strings, it is unlikely that it will change the culture or pace of that organization. Just to put the investment by Visa in perspective, in January, Square was reported to have closed on a $200 million round – an investment in the “single millions” is certainly important but not material. Both, though, have a lot to gain as a result of this transaction.
As for Intuit and GoPayment, they are an impressive company with a savvy team leading their small business and payments segments. This multi-billion dollar company channels a West Coast/Silicon Valley entrepreneurial karma and operates like a startup – testing, learning and evolving as the market provides feedback on their solutions. They have two years of experience with GoPayment under their belt and a healthy head start with 4.5 million businesses (and growing) that have revenue streams and serious receivables problems to solve, along with the further advantage of an attractive suite of solutions that make their relationships with Intuit sticky and highly desirable. They also have some interesting assets in sectors where mobile acceptance solutions could be quite useful, such as healthcare. And the scenario I just painted for Visa and Square? No reason why Intuit can’t do the same and faster.
As for small businesses, they’ll likely win either way and are already winning. Square and GoPayment today solve two different problems for two different segments, those businesses are already farther ahead than they were before those solutions came into the market. And the market competition has dropped prices for everyone, too – a welcome outcome in these still difficult economic times.
So, what are your thoughts (in 2000 words or less)?
Karen Webster is the President of Market Platform Dynamics (MPD), a consulting firm that helps companies find, implement and monetize innovation. She serves as an advisor and member of the board for a number of companies operating in the payment, technology and digital media industries. More info here.