Square has become a bit of a media darling recently and received much press attention when they yesterday announced that they have closed their Series B funding round for $27.5 million led by Sequoia Capital, which values the company to $200 million. Square is headed by Jack Dorsey, the co-founder of Twitter, and is benefitting from this association in the media. However, it has also developed an exciting, new product that merits attention on its own.
Unlike most mobile payments companies, Square is not challenging the cards industry, but taking a more pragmatic approach that is likely to give greater payoff in the short term. It works from the observation that everyone already have plastic cards and that this model works quite well for now.
However, not all merchants are able to easily get card terminals and merchant agreements. Square has therefore developed a device that turns any mobile device into a card terminal and developed an approach that enables anyone to get set up to accept cards in minutes. The technical innovation is a small, square card-reader that plugs into the phonejack of any mobile device and processes Visa, Mastercard, Amex and Discover cards.
The device is cheap to produce and Square distribute them for free to merchants that sign up for their service. This has proven very popular, with between 30,000 and 50,000 merchants signing up per month since launch in October 2010. It is especially smaller merchants for whom it was previously not cost efficient or convenient to accept cards that sign up for Square.
It is primarily this market positioning that differentiate Square from other providers that have launched similar products over the last year, such as Verifone, Intuit and HomeATM. None of these have seen the same level of success, either due to more stringent merchant agreements, or possibly because they have been outshone by Jack Dorsey’s star power.
However, a number of market participants have warned against lacking security features on Square. Essentially, Square relies on the mobile device to encrypt the magstripe data, whereas more secure devices perform this encryption at the magnetic head. With Square’s approach there is a risk that the mobile device is hacked and that the credit card data is intercepted before it has been encrypted, and therefore exposing the cardholder to fraud.
Moreover, Square and other mobile acceptance devices do not really tackle the bigger issues where cardholders and merchants hope to benefit from mobile payments. They may bring some convenience for smaller, mobile merchants, and may justify its media hype and valuation on this basis alone. However, it does not reduce merchant fees or improve security and is therefore unlikely to make a bigger dent in the card industry.
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