In the case of Square Inc., the evolution of a payments startup is on full display. Rumors that the small business-focused innovator was seeking a buyer in the tech industry to stem its flow of red ink has given way to the elimination of its general-use mobile wallet and a refocus on a food and drink preordering app, followed by news that it is now offering merchant cash advances (MCAs).
It was only April 2014 when news surfaced that Square had apparently engaged in talks with tech giants Google Inc. and Apple Inc. to buy the San Francisco startup. While the reports were based on anonymous sources and Square publicly denied the claims, Square's reported inability to generate a profit gives rise to the notion that selling the business would be a way out of its revenue deficit.
By the middle of May, Square was still a standalone entity, but it had abandoned Square Wallet, the payment app Square co-founder Jack Dorsey said was the future of in-store payments. Tech news site Re/Code initially reported Square's decision to remove the app from the app stores of Google and Apple, although Square said it will still support the app for users who have already downloaded the mobile wallet to their smartphones.
Square replaced Square Wallet with Square Order, which is designed to facilitate the pre-ordering of food and beverages at restaurants and other establishments that utilize Square's transaction services. The new app currently functions only with select Square merchants in San Francisco and New York City.
Square Wallet was rolled out in October and November 2012 via a partnership with Starbucks Coffee Co. It seemed like a perfect fit, as it offered coffee lovers an innovative way to satisfy their caffeine fix at approximately 7,000 Starbucks stores nationwide. But consumers apparently never bought in, even when Square added gift card functionality to the wallet in early December of that year.
According to Nathalie Reinelt, Analyst at Aite Group LLC, the fundamental weakness of Square Wallet was lack of scale. "[Square] limited its use to only Square merchants and didn't provide consumers with an incentive to use its mobile wallet," she said. "Mobile payments itself isn't solving a problem consumers are having while transacting, and without ties to loyalty and rewards, consumers likely didn't see the value."
Reinelt believes Square Order suffers from the same shortcomings because the ability to preorder and not having to wait in line at restaurants to pick up orders may not be enough incentive for large numbers of consumers to adopt it. "Wallets that incentivize consumers with added features and benefits have a better chance of gaining traction," she said, adding that consumers seek more than just one specific functionality in apps. "[T]hey are looking for a holistic approach to consumer engagement and loyalty," she said.
Another potential pitfall to Square Order is its pricing. Merchants are reportedly charged a whopping 8 percent transaction fee to facilitate orders, whereas Square's standard rate is 2.75 percent. "Square justified the extravagant premium by stating that Square Order will bring in new business [for merchants], but I don't think merchants will realize enough return on their investment to buy into it," Reinelt said. "Without enough merchants consistently opting in on order-ahead functionality, consumers will eventually lose interest due to the lack of availability."
Reinelt maintains that the general lack of mobile wallet uptake to date by consumers and retailers alike is a product of technological limitations of near field communication (NFC) and a contactless payment infrastructure that has been slow to develop. But that is apparently changing.
"Up until recently, NFC was very limiting due to the control mobile carriers had over the secure element on the hardware," Reinelt said. "Now that HCE [host card emulation] has been included in the latest Android release and MasterCard/Visa have endorsed remote secure elements, NFC can now be securely deployed in other mobile wallet products via the cloud."
A lack of Europay/MasterCard/Visa (EMV) -enabled contactless POS terminals in the marketplace has been another barrier. But that is also changing. "[M]erchants face a liability shift due to EMV and the deadline for conversion is fast approaching [and] upgrades in merchant terminals will result in more contactless terminal availability," Reinelt noted.
Additionally, Reinelt observed that quick service restaurants are becoming more comfortable deploying contactless payments, such as barcode- and quick response code-based solutions at the POS, as they help to bolster loyalty and rewards programs.
Reinelt also pointed out that Square's shift away from the wallet is not a good barometer to judge the state of the overall in-store mobile payments sector. "Square is primarily focused on Square merchants, which is great for the merchants, but does not address what the consumers are looking for in mobile payments: loyalty and rewards," she said.
Reinelt added that the mobile wallets of Isis and Google Inc. are more "merchant agnostic" and have greater potential to achieve scale. She added that there is also "a whole arsenal of white-label mobile payment providers [that] are trying to replicate the Starbucks model."
On May 28, Square introduced Square Capital, its MCA service. In a press release heralding the new program, Square indicated it had provided "tens of millions of dollars in capital" to merchants under a pilot program. "During the pilot program, thousands of sellers used Square Capital to buy equipment and inventory, hire more employees, and add new stores," Square stated. "Many neighborhood businesses with access to alternative funding sources chose Square Capital for the simple and fast process."
Merchants processing with Square apply for advances, and Square evaluates their transaction history to assess eligibility and determine advance amounts. "Square can offer capital to a wide array of young companies with high-growth potential – something that many financial institutions do not do. Square's data enables a holistic and real-time understanding of a business' sales history, growth, cash flow, and financial needs," Square stated.
Instead of charging interest, Square is paid a flat fee for the funds. It automatically deducts a percentage of daily credit card sales from merchant accounts until the advance is repaid. The cost is said to be lower than a typical cash advance, but higher than a traditional bank loan, the latter of which most startup and smaller businesses using Square cannot obtain anyway.
Reinelt stated that Square's move into the MCA field fits its corporate identity of helping small merchants grow their businesses. "[T]his is very much in line with that objective," she said.
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