Friday, July 1, 2011
Square Inc. received a $100 million shot in the financial arm from the venture capital firm Kleiner Perkins Caufield & Byers and investment manager Tiger Global Management LLC. Square is a startup mobile payment technology firm that allows any Google Inc. Android device or Apple Inc. iPhone or iPad to accept card payments.
The cash infusion is new ammunition as Square aims to strengthen its position in the small business and person-to-person marketplace for card-present payment technology.
"Square has a great product with extensibility, which we believe has the potential to have a lasting impact on how people make payments," said KPCB Partner Mary Meeker, who was appointed to Square's board after her company's investment. "Square's product is fast, easy and fun for both consumers and vendors; a small business can be up and running within minutes."
Square is the brainchild of Twitter Inc. founder Jack Dorsey. "Our goal is to empower everyone to accept payments anywhere, and we are on course to accelerate our growth in a meaningful way," he said.
In addition to its signature card reader that attaches to smart phones and iPads, Square also packages an application that allows an iPad to function as a cash register, and it has developed Card Case to allow consumers to pay for purchases using smart phones.
The company is targeting small businesses and individuals – for example, artists working craft shows, service clubs working local fairs, vendors at local farmers markets, small companies at tradeshows, and other on-the-spot transactions. The hardware, a 1-inch square that attaches to a smart phone or iPad, is free. Square charges a 2.75 percent fee on every transaction. There are no contracts or complicated fee schedules.
Square, as a hot technology company, is attracting a strong array of investors while its valuation soars – even though the company has yet to make a profit. The Wall Street Journal reported Square, with its new $100 million Kleiner Perkins investment, is now worth more than $1 billion. Though The New York Times reported Square is set to lose as much as $20 million in 2011 (processing nearly $4 million in payments daily), it also indicated Square projects a profit in 2012, with revenues of more than $200 million (and processing exceeding $1 billion).
The New York Times also noted Khosla Ventures invested $10 million in Square in 2009 when the company was valued at $45 million. Sequoia Capital invested $27.5 million in January 2011 when Square was valued at $240 million. Visa Inc. and JPMorgan Chase & Co. have also publicly acknowledged investing in Square but did not reveal the amounts of their stakes.
The rapid increase in the company's value speaks to its success, as do its competitors: Google matched Card Case with its Google Wallet release in May; Intuit's GoPayment is similar to Square's card reader; and, on the same day the Kleiner Perkins investment was announced, Dynamics Inc. revealed it has closed a $35 million investment deal with Bain Capital Ventures to continue development of its card reading technology similar to Square's.
Square directly challenges the market now dominated by POS manufacturers like VeriFone Inc. Verifone directly challenged Square earlier this year with ads accusing Square technology of not being secure. When Visa invested in Square, Visa asked Square to add transaction encryption to its device. Square reportedly agreed and is working on the technology.
Many ISOs and merchant level salespeople (MLSs) are concerned about the implications of Square on the future of their businesses. Will Wong Graylin, founder and Chief Executive Officer of Boston's ROAM Data, a mobile application designer and manufacturing firm, told The Green Sheet he believes MLSs can compete with Square for business on the lower end of the processing pyramid.
"$127 million gives Square some serious gunpowder for a business model shift," Graylin said. "They are losing money on customer acquisition giving their hardware away for free and on risk management (fraud). With the kind of cash [Square] has now they can withstand further barrage on their current business model where they are bleeding cash heavily and competing with a lot of our customers.
"We are not competing with Square. We build applications that allow people to have the right technologies and services for their business. We offer options Square can't offer to create a level playing field."
Graylin emphasized the solutions his company and others build have security features such as full encryption that provide ISOs and MLSs a turnkey package that can compete successfully with Square. Graylin believes savvy feet on the street see the lower-end market segment targeted by Square as a "flash in the pan."
"Existing [payment professionals] will model after some of the things Intuit is doing," he predicted. "They will also rely on what Square doesn't do. Anybody who is going to transact more than $1,000 per month is going to look to existing market providers for solutions. Merchant discount fees are too high for Square."
Square "woke up the industry" to a new market segment, and the industry can compete aggressively there with more comprehensive solutions, Graylin said. He believes Square technology is still not reliable enough for many small businesses like restaurants, and it provides neither the support nor the lower discount fees these small businesses expect.
"These businesses use more robust solutions that have features like end-to-end security," he said. "We can allow customized applications as well. Square doesn't play in that space."
Theodore Svoronos is co-founder of Merchant University, an education resource for agents in the payment industry. He said the Square model is not proven in the marketplace. "Up to this point, Square has been for individual or person-to-person transaction relationships," he said. "I don't expect merchants will be getting rid of their cash registers anytime soon. There are lots of issues regarding security. That is a glaring weakness and an eye opener. You have to ask why people keep buying into it. Maybe they know something we don't."
Ken Musante, President of Eureka Payments LLC, said, "From a valuation perspective I find Square extremely perplexing. They are doing $1 million a day in processing and suddenly they are worth $1.5 billion?"
Musante said, though, the valuation seems to represent the threat Square presents to ISOs is real. "From an ISO perspective I do see them as real competition," Musante said. "My company has a monthly fee, but our rates for transacting mobile payments are low compared to Square. I am comfortable ceding the low-end users to Square. My concern is, will they start to eat into my business?"
Musante predicted Square will eventually change its business model to either focus on "real merchants" or move to a person-to-person payment platform. He believes that if the company goes to a person-to-person model, it will drop its swipe device in favor of another, more secure, quicker mechanism.
"It's kind of interesting with the MasterCard/Visa fees going up out there – monthly fees especially," Musante said. "The more fees come into play on a monthly basis, the more attractive Square is."
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