Why Square’s Greatest Ambition Has Become Its Biggest Threat

“Dorsey is the only guy in the industry who’s thinking about payments in a deep way, and Square is the only payments company that’s innovating on hardware, software, and price. Now, as we approach the launch of the Starbucks collaboration, I think we’ll see this approach pay off. This will be Square’s moment: Millions of people will see its magical payment system in action for the first time. Once they get hooked on it, they won’t want to stop.”
—Slate – September 2012

What a difference a couple of years makes.

Lots of companies enter payments with an ambition to disrupt the “status quo.” But perhaps none caused more heartburn than Square back in 2009 when it launched. The combination of Jack Dorsey’s Twitter pedigree, its San Francisco “cool” factor, high profile Silicon Valley backing and giant PR and media machine unleashed an avalanche of queries from Board members to CEOs and from CEOs to executive management about their “Square strategy.” Just about every presentation I made to CEOs and Boards in the first few years of Square’s existence included at least one 15-minute discussion on Square and whether it was, indeed, a threat to their business.

Back then, Dorsey’s stated mission was to create a payments network – a payments ecosystem powered by Square – of consumers and merchants. Dorsey’s intention was to remove the “ick” factor from payments and make the entire process of payments invisible. In an interview he did a few years ago, Dorsey described the experience of buying something in a high-end boutique. A sales associate makes the sale buy when it comes time to checkout, he remarked, they take the consumer’s card to the “back room” where ugly POS registers are sequestered. After a few minutes, they return to present the customer with a “$5 envelope” in which both the card and the receipt of purchase is contained. Dorsey speculated that the act of paying for things was considered so ugly by retailers that it needed to be removed from the customer’s sight in order to preserve a good consumer experience. And because not all merchants could afford said $5 envelope for receipts and cards, Dorsey wanted Square to be that solution for all merchants and the consumers they interacted with  – but made entirely digital.

Today, Square is a very, very long way from delivering on that vision.

And its failure to do so is an important object lesson for payments.

Let’s start at the beginning.

Whenever I was asked about Square and its impact on and relevance to payments, I focused on three key areas that Square truly did innovate and disrupt.

First, Square’s innovation – more than anything else – was its business model.

Simply stated, Square removed the friction associated with obtaining a merchant account. Square’s focus to start was the 27 million or so micro merchants who didn’t accept cards because they couldn’t get a merchant account or found it to be too expensive to get one. As a category, these merchants were never really considered attractive to the more traditional acquirers given their high risk, and therefore high potential for chargebacks and churn, so were largely ignored. Square’s proposition gave everyone who wanted to accept cards but were turned down or walked away because of high fees, a dongle that would let them do that at a flat fee – and as an aggregator, Square took on the merchant risk.

And, in so doing, Dorsey and Square turned the acquirer business model for small merchants doing business in a physical retail setting on its head.

Second, Square proved that payments could happen anywhere with anyone.

The notion of using a device that turned an iPhone into a POS terminal not only made payments accessible to a whole new swath of merchants but also made payments mobile. Consumers could use their cards to buy from vendors at farmers markets, flea markets, antique shows, school fairs, taxi cabs outside of major cities, garage sales – basically anywhere that a person with a product and a consumer that wanted to buy it got together. Sales for those merchants rose, as did the likelihood that consumers carrying cards would spend more than consumers carrying only cash would. It was a game changer for payments and helped to ignite commerce in places where there was a lot of friction otherwise.

Third, Dorsey and Square didn’t have a payments chicken and egg problem to crack.  

Since all that Square did was enable merchants who didn’t accept card payments to do that with the cards that consumers already had in their wallets, Square sidestepped the headache of having to get both consumers and merchants on board. Square didn’t need to generate network effects to succeed – it just needed to get merchants to sign up. Once they did, just like any other merchant, they could serve consumers with existing payments cards.

So, it was the combination of all of those things that thrust Square into the crosshairs of payments players far and wide. Square might not have been first innovator to offer a mobile point of sale solution (mPOS) but it was certainly the highest profile player to do so – and clearly ignited the category.

A category that has literally exploded as hundreds of players have entered the market to replicate the Square model and evolved the mPOS space. And that it has. Over the years, mPOS has morphed from being only about enabling card acceptance on smartphones to platforms with apps that power front and back office functionality for SMBs, expose APIs that enable the easy assimilation of additional features and functions for the merchants that want more, and enable payments processing for merchants with existing merchant accounts. To that point, mPOS is no longer the solution for the Ma and Pa retailer that couldn’t get a merchant account. Tablets that enable payments are used by many retailers for line busting, pop up stores and a variety of other retail use cases that eliminate friction from the merchant/consumer checkout experience. In fact, it’s a market that’s become so big and diverse that we track its activity here each month.

But Dorsey was never just about giving small merchants a way to accept card payments, even though that’s where he started.

His stated vision for Square was to control both ends of the payments ecosystem – the merchant and the consumer. In an interview that Dorsey did with MPD co-founder David Evans shortly after Square launched in 2009, Dorsey made it very clear that giving consumers a mobile wallet and an “elegant” way to pay at merchants was Square’s end game.

We got our first peek at Square’s move toward that end game goal in 2011 when Square launched its mobile wallet, Card Case. And, the decibel level of payments players seeing Square as a formidable competitor got nothing but higher.

Square didn’t just introduce a mobile wallet, it also introduced a new concept for enabling payment at a merchant – geofencing. Card Case users could essentially pay with their face at checkout. Card Case users would be recognized upon entering the merchant, and at checkout, would be “authenticated” by matching the picture on the sales clerk’s register.

Elegant and invisible – just like Dorsey promised.

But it was Square’s partnership with Starbucks that truly elevated the blood pressure of everyone in payments.

In 2012, Square announced that its mobile wallet would be accepted at all of Starbucks’ 7k locations, a partnership that Starbucks’ Chief Digital Officer said was based on believing in the “values and visions of Square.”

The payments ecosystem collectively clutched its chest.

Bye-bye acquirers, see ya later PayPal, pundits proffered – pointing to Square’s ability to acquire consumers by piggybacking on a highly trafficked coffee chain that also happened to operate the most successful in-store mobile payments player to date. I even speculated in an article that I wrote at the time that Square might even be clever enough to use Starbucks’ 7k stores as “anchor tenants” for an ignition strategy that would help it acquire both consumers and merchants adjacent to Starbucks locations. Forbes, totally enamored with this mashup, published an article in August 2012 with a headline saying that it would mean the “end of cash.”

Unfortunately for Square, it was more like the end of the Square’s focus on building out the consumer side of its platform.

Not even two years later, in May of 2014, Square shuttered Card Case (which was rebranded Pay with Square a year earlier) and in December of 2014 severed its relationship with Starbucks. It also closed down Order, an app that enabled consumers to order food online and pick up in-store.

Today, Square seems focused entirely on the merchant services. It’s launched financing (Square Capital), a variety of applications to help small merchants run their businesses (email marketing, CRM, appointments, accounting/bookkeeping), enable P2P payments between people and micro/small businesses (CashTags) and POS hardware (Square Stand/Register). It has a marketplace, Square Market, so that its physical merchants can go omnichannel and list their products online if they wish. It’s also made a few acquisitions in the food services space – Caviar and Fastbites – to get more immersed in the restaurant POS space, it says.

If you’re curious about all of the things that Square has done since its launch, check out this table. You’ll see immediately that 2014 was the year that Square put this pivot in motion.

Square has also postponed, it says indefinitely, its IPO (on rumors that its balance sheet would not support the valuation it was seeking) and denied plans that it ever put itself up for sale (rumors were that it would sell out to Google or Apple a year ago.) Dorsey also personally refuted a rather scathing criticism leveled at Square last year by The Wall Street Journal – an article claiming Square was running out of cash and operating at a massive loss. Dorsey channeled his inner Jeff Bezos, explaining that Square does what lots of startups do and simply reinvests profits back into the business. The losses were all part of the plan.

So what can the payments industry take away – and learn from – the Square experience so far?

I think a few things.

Igniting a payments network is hard.
Yeah, yeah, yeah. Tell me something we don’t already know. But it’s amazing how many innovators underestimate the complexity of payments because it looks so easy on the surface. So it isn’t all that surprising that a creative and high energy innovator who didn’t know payments but thought he could build a better mousetrap and solve a small merchant problem related to card acceptance, would think that mashing all of those merchants into a network that consumers would then be motivated to download a mobile app and use at those merchant locations would be sensible and even easy to accomplish.

But that’s the hardest problem in payments — maybe even in all of business — to solve. Just ask Apple Pay, the player that came into payments with the backing of the entire payments ecosystem and a devoted consumer base and is discovering just how hard payments ignition is. Innovators need enough of the right merchants in the right segments and places to get consumers to move. And when Square merchants are flea market vendors, food truck people, Girl Scouts selling cookies in front of the supermarket, and the occasional errant taxi driver, it’s hard to fashion enough of a local merchant network to get consumers motivated to do anything other than whip out a card to pay them.

Knowing how payments works turns out to be pretty important if you want to be in payments.    
Dorsey’s lack of payments knowledge or payments industry affiliation was something that he and his team wore as a badge of honor. It was lauded as something that gave them the license to think out of the box and create something entirely new. And, that it certainly did.

The out of the box part was cleverly solving the card acceptance problem for the 27 million businesses that didn’t have or couldn’t get a merchant account for a variety of reasons. And, those businesses seemed like the no-brainer target segment to go after for the obvious reason.

Except that there was a reason that the traditional acquirers didn’t go after those businesses or if they did, priced the business to reflect its risk profile.

Of course, the flat fee offered by Square was very attractive to these new-to-card-accepting merchants. But, unfortunately those fees were not always enough to cover Square’s losses due to fraud or chargebacks or the cost of acceptance of some card products (e.g. American Express or anyone using Square at Starbucks). New to card accepting merchants like flea market vendors or farmer’s market sellers also delivered lumpy volume not big enough to really move the processing revenue needle. And small merchants with existing merchant accounts and a history may have found Square’s pricing too high, especially if most of their volume was attributed to debit card products.

Square’s pricing model also kicked off a bit of a race to the bottom, with acquirers matching fees in an effort not to be undercut by Square and lose business. Slowly, however, many players realized that the business they were losing wasn’t worth keeping anyway and were happy to step back and have Square take them on and lose money servicing them.

Payments isn’t about just about payments for merchants either.
In 2009, giving a piece of hardware and a merchant account to a micro-merchant that just enabled card acceptance was enough to get Square off the ground. But, it wasn’t enough to keep and/or attract the larger SMBs interested in building and running their businesses – merchants who are much more attractive and profitable merchant customers.

The big shift on the acquiring side of the business is the shift to POS in the cloud and software and apps that enable functionality irrespective of the hardware needed to support it. Acquirers also recognize that for that value to have, well, value, the functionality merchants seek is increasingly segment specific – restaurants need different things than plumbers who need different things than specialty retailers. And all merchants want the ability to push out offers and offer loyalty programs for their customers.

Square’s focus on building up its consumer side of the business for the first four or so years kept it from focusing on what mattered to the merchants it would need to move its business upmarket – to those more established, more attractive merchants.

But others did.

PayPal and Intuit and First Data and Vantiv and PayPal and Poynt and NCR and Ingenico with its purchase of Roam and even Groupon through Breadcrumb all bundled an array of value-added functionality into their offerings – functionality that helped merchants do much more than accept card payments. Access to working capital, data, data-driven offers, enabling different payment types, gift cards, transactional credit, industry specific functionality, loyalty/CRM and more were all part of their integrated payments/mPOS offerings to merchants that didn’t really need an aggregator for payments processing as much as they needed a single source for solutions that helped them run their businesses.

But by the time Square decided to abandon the consumer side of its business in 2014 and fill out its portfolio with new features and functions, the competition was much, much more intense and relationships with merchants much harder to garner. This left Square, once again, with its unenviable position as being the “go-to” for the newer, smaller, riskier and less profitable merchants and competing head-to-head for existing merchant business with well-established competitors with very strong offerings.

The channel turns out to be pretty important.

The great paradox of small merchants is this: there are a ton of them but they are the hardest group of merchants to find and then serve. SMBs are very heterogeneous and there’s no organized way to reach them.

When flea market sellers and food trucks and Brownie troops were Square’s target market, word of mouth and TV advertising was good enough. But moving upmarket to a larger small business requires feet on the street and a very concerted marketing effort. That’s what ISOs and acquirers do all day long. But as a competitor, that channel was totally shut off to Square, leaving them to buy ads and keywords on Google and field a sales team – all of which is costly and time intensive. Of course all of this comes at a point in time when the competitive field is larger with lots more feet on the street and established partnerships to help those competitors build a robust sales pipeline.

Making payments invisible was Square’s biggest ambition – but is now its biggest threat.
Dorsey said something a few years ago that I thought was incredibly insightful – that the future of payments is making it invisible. And, he’s right. Embedding payments in apps and connected devices like Amazon’s Dash button and even cars  – is the future of payments.

But, that’s been Square’s biggest fail.

Today, Square is about as far away from making payments invisible as one gets. Its core business is enabling payments via cards primarily for merchants that use their Square POS products (tablets or dongles).

And since Square doesn’t control the consumer side of payment, it also has no ability to make payments invisible. That’s up to someone else in the payments ecosystem now, subject to a merchant’s decision to enable that payments method and Square’s ability to accept it. What’s more, Square is pretty vulnerable to anyone else who decides to make payments invisible by embedding payment in an app wrapped around an integrated payments POS solution. And there are a lot of flavors of those players out there today whose capabilities are pointed right at Square’s target merchant population – think Uber and Airbnb. In just about every instance, Square becomes invisible because Square becomes unnecessary.

Jack Dorsey spoke on the record for Buzzfeed last week for the first time since December 2014. He was described in the article as looking “a little older, and considerably more ragged” in sharp contrast, the reporter wrote, from the “exquisitely put together” person he last saw. Dorsey defended the dog’s breakfast of activities that has consumed Square’s time, attention and pocketbook over the last year as all part of the bigger plan to “make commerce easier.”

But Dorsey and Square are trying to make commerce easier at the moment in time that it’s become harder and harder to do.

People caution not to count Dorsey out – he’s clever and ambitious and has a history of disruption, they say. All true.

But, Square’s set of services isn’t particularly unique anymore and its micro/small merchant portfolio not particularly stable or attractive, overall. Its Square Cash and CashTags is clever and taps into the P2P movement that everyone says is the next big payments revolution – but an area that no one has been able to monetize or scale in any meaningful way. And of the players that have the greatest opportunity to do that, I don’t think that Square is at the top of that list.

What Square opened the payments industry’s eyes to in 2009 was the value of enabling businesses to accept digital payments anytime and anywhere and with anyone.

What it has taught the payments industry since then is the necessity of making that aspect of the payments experience totally invisible to the small merchant by making it part of something bigger that adds value to their business.

Making payments invisible, as Dorsey said in 2014, is indeed the future. But as things now stand, a future that appears to be as much of a threat to Square as it is their greatest ambition.