Square taps into the mobile payment business
SAN FRANCISCO — If only all purchases were this quick and easy.
Jack Dorsey picked up a handful of artisan-brewed sodas at the Fizzary, a soda shop in San Francisco’s Mission District.
“I’m Jack,” he told the shopkeeper behind the counter who charged the sodas to Dorsey’s credit card by tapping on Dorsey’s photograph that had popped up on an iPad behind the counter. In seconds, Dorsey’s iPhone 5 vibrated in the pocket of his black leather jacket to let him know that the transaction was complete.
Dorsey, the 36-year-old creator of Twitter, was showing off the latest technology from his new company, Square Inc., a San Francisco upstart that wants to radically reinvent how people pay for stuff.
Square Wallet powers transactions on Apple Inc’s iPhone and iPad as well as devices running Google Inc.'s Android software. Dorsey had the app on his iPhone set up to “talk” to the soda shop’s iPad so the Fizzary knew who he was as soon as he walked through the door.
Even though it was his first time at the Fizzary, Dorsey said he felt like a regular.
“It’s like having a house account,” said Dorsey, co-founder and chief executive of Square. “It feels amazing.”
Dorsey envisions a world where no one has to carry cash or even a driver’s license or identity card.
“My ultimate goal is for no one to have to carry a wallet,” Dorsey said.
Paying by using a mobile device is becoming increasingly common, but he’s a long way from replacing wallets with smartphones. Dorsey selected the Fizzary because shoppers can pay there with Square. That’s not the case at many of the storefronts that surround the soda shop.
But Square, which makes mobile payment technology that basically lets anyone accept plastic, is making inroads. The company says it’s processing about $10 billion in transactions on an annualized basis.
According to Square, businesses in California processed more than $1 billion in payments last year, more than $500 million of which was in the Los Angeles area. And in the Mission District, where many Square employees live and shop, the payments system is used by a growing number of merchants — more than 1,000 — processing $10 million in transactions in 2012.
That’s small compared with what’s potentially at stake in the scramble for a piece of the mobile payments market: millions of merchants, billions of transactions and trillions of dollars.
Forrester Research analyst Denee Carrington predicts that over the next five years, U.S. consumers will spend money using mobile payments at an accelerating rate: $90 billion by the end of 2017, up from $12.8 billion last year.
In 2012, 36% of online consumers with mobile phones said they would be open to making this kind of a payment in a store, Carrington said. She expects that number to increase as consumers become more comfortable with the payment options offered by Square competitors — Google, EBay’s PayPal and others — that connect with the devices that are already in people’s pockets.
“Square is doing a really great job at enabling products and services for smaller merchants that they might not otherwise have access to,” Carrington said. “It remains to be seen if Square can effectively scale its business.”
Square has made some progress in pushing into the mainstream. In August it struck a high-profile deal with Starbucks to process credit and debit card transactions at Starbucks’ 7,000 stores in the United States, putting the technology on street corners around the country. It also added the coffee chain’s CEO, Howard Schultz, to Square’s board, and Starbucks invested $25 million in Square as part of its latest round of financing.
That financing valued Square at nearly $3.3 billion and brought its total amount raised to $341 million. This year, Square plans to move into bigger offices as the company seeks to expand its workforce to 1,000, more than twice its current size.
Square is a remarkable second act for Dorsey in Silicon Valley, where entrepreneurs rarely strike gold twice. He came up with the idea for Twitter and still serves as its executive chairman. His role as a co-founder in both companies has made him a billionaire.
Dorsey says he’s proud that piano and yoga teachers, pop-up shops and food trucks can now swipe Visa, MasterCard, Discover and American Express through Square devices.
That’s why he dived into the highly competitive, regulated and complex business of payments in the first place. Square’s co-founder is Jim McKelvey, a glassblower who had designed a $2,500 bathroom faucet but didn’t make a sale because he couldn’t process a credit card.
So he and Dorsey put their heads together in 2009 on a credit card reader that attaches to a smartphone and swipes cards for a 2.75% transaction fee, most of which Square turns over to credit card companies. Square recently started offering merchants the option of paying $275 a month for an unlimited number of transactions, up to $250,000 a year.
Square also has begun offering merchants more data to bring them closer to their customers. A service called Square Register turns a mobile device or tablet into a point-of-sale system that also provides inventory management, customer tracking and business analytics. Last month, Square gave merchants the ability to sell gift cards to shoppers.
UC Irvine anthropology professor Bill Maurer said Square leaped ahead of competitors by using existing technology to create payment systems that blend into the background. It also took advantage of existing consumer behavior, swiping credit cards, rather than asking consumers to learn a whole new way of paying for something. And it targeted an underserved niche: businesses that couldn’t take credit cards.
Now it’s trying to win over mom-and-pop businesses and mega chains across the country. Some have expressed concerns over privacy and security but, by and large, industry observers say merchants and consumers are being won over by this new way of paying for goods and services.
Taylor Peck, co-owner of the Fizzary, estimates that 75% of the transactions of $10 or more in his store are now processed through Square. The soda shop still has an old-fashioned register for cash transactions but now tracks all transactions on Square.
The technology is designed to make face-to-face commerce more personal, Dorsey says.
At a nearby shop in the Mission District, Dorsey orders wheat-grass shots and quizzes Cesar Ramirez, who opened Corazon Juicebar with his mother, on how he uses Square.
The Square software was free, and he didn’t have to buy an expensive, bulky cash register, which saved money and space in the tiny shop, he said. Even the transaction fees were lower.
“People seem to be entertained when they come in here and use Square,” Ramirez said. “They say: ‘That’s really cool.’ ”
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