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The Green Sheet Online Edition

November 24, 2014 • Issue 14:11:02

Dare to think like Square

By Alex Nouri
EFT Direct

I have seen attacks on Square Inc. in the last 18 months by several professionals in the payment processing industry. They have criticized Square in different ways, yet essentially they have all pointed to Square's lack of customer service as the reason Square does not deserve to be a contender worthy of respect. They all believe Square is not helping itself by providing email-only support to merchants.

Although I believe in the value of immediate technical and customer-service support and pride myself as one such provider, I nonetheless feel compelled to share my thoughts in defense of Square, a company with which I have no affiliation whatsoever.

Square's swift rise

Square rose to the highest ranks in payments in a very short time. It was able to obtain Starbucks Coffee Co. as its client and a major investor within two years of market introduction. Which company in the payments industry has been able to accomplish those milestones?

Square started marketing its services in 2010 and has secured more than $300 million dollars in venture capital funds in only four years. Which company in our industry has been able to rise to this height?

Square has not made money yet. But its processing volume is hovering around $20 billion in 2014 and is expected to reach $30 billion in 2015; in addition, the company boasts that 50 percent of its merchant base is in the brick-and-mortar category – a staggering success in and of itself. I believe profit will follow soon. Square's other revenue and/or profit may come from a source that has received scant attention to date: data mining and its use in shopper advertising.

Square's innovations

Square has constantly innovated through release of its green, practical and money-saving mobile processing and real-time transaction reporting available to merchants on tablets and smartphones; its own easy-to-install and operate POS system for the retail and restaurant sectors, with email and interactive receipts; its own online order taking capability, which most POS systems still don't have, nor does any acquirer or merchant service provider (MSP) have on its plate to provide; and finally its incredibly convenient one-touch, next-day funding cash advance program built right into its sleek POS system.

Square has a valuation of $5 billion to $6 billion. Although this figure is Square's own, it is safe to have little doubt that Square will beat the odds and will bring profitability and further investor confidence.

Unfortunately, Square's accomplishments and accolades have not been matched by even the largest and richest acquirers and MSPs in our industry. What Square teaches us is that imagination and innovation are crucial components to the drivers of growth now – and will be for many years to come, as well.

Square's mindset

Clear vision is the great quality of Jack Dorsey and those around him. Sadly, and with all due respect, I have found that many executives in the payments industry do not realize the merchant acquiring industry will no longer be about just processing credit and gift cards. More importantly, mere mergers and acquisitions will not be enough to benefit from economies of scale.

Being big can be great, but only if a company invests in human capital and information technology upgrades, improves its internal and external and intra-relationship processes, and becomes cognizant of its need to be nimble as it grows, so it doesn't turn into a giant turtle, as (oddly enough) some of the largest companies in our industry have (inadvertently) become.

For payment companies to steer in the right direction and grow into healthy enterprises, attitudes must change. Those with inflexible attitudes are relegated to the dungeon of the mental past. Stagnation sets in, which leads to inefficiencies, depleted resources, lack of innovation and creativity, wasteful duplication or triplication of efforts, lost revenue and lowered profitability, all collectively creating a perpetual self-destructive cycle, every morning, month after month and year after year. All this occurs right under the nose of executives with rigid attitudes without them even realizing it.

Square's challenges

Having said all the above, despite its astonishing growth in such a short time, even Square has to be mindful of competition, new technologies, and consumer behavior and trends on the horizon. Consumer behavior is the most difficult to predict; it cannot be likened to making a salad from a stock list of ingredients. One failed strategy or inappropriate mind shift could cost any company dearly no matter how large or strong it is, or how innovative it has been in the past. I believe Square is mindful of future trends and competitive forces.

Some ISOs and MSPs have grown substantially in the last few years, not organically but through multiple acquisitions. Along the way, they have tacked on new or increased fees to merchants (for example, IRS reporting fees, Payment Card Industry Data Security Standard compliance certification fees and annual fees) to generate huge financial windfalls for their owners with little to no meaningful direct or indirect investment in their IT infrastructures, no solutions that would benefit merchants directly and no upgraded POS systems, to name a few.

Square's lessons

The small efforts I have witnessed in my 14 years in this industry cannot match Square's real and intrinsic value proposition. We must envision, innovate and emulate. Otherwise, at the end, all that will be left for those who miss the boat will be outmoded companies with many things to lose and not much to offer. It is always best to opt for sustainable gain than immediate yet untenable strategies.

I sincerely hope payment pros who disparage Square will be willing to acknowledge that it's precisely the great mind and vision, the right strategies, and proper paving of its path by its creator that have resulted in Square's growth and its importance in the landscape of merchant processing. Combined, these factors have forced us into talking about and competing with Square.

Square's opponents grace us all by sharing their views. It's free speech at work. However, I think we all must be cognizant of not having tunnel vision, which may lead to an undesired and surprise destination: to be just another unremarkable processor of credit cards. Let's see where everyone will be seven to 10 years from now.

The Green Sheet, Inc.Side Note:

Square is evolving

Square wasn't the first company to introduce a software and dongle combination to harness mobile phones for payment acceptance. Roam Data Inc. beat them to market by several months when it introduced ROAMpay Swipe in early 2010.

However, unlike Roam, which sought to work with the ISO and merchant level salesperson (MLS) channel, Square was the first company to directly solicit micro merchants, whose business volume is, by and large, too small for them to qualify for traditional merchant accounts.

Initially, traditional payment companies felt Square was no threat; they are not particularly interested in the micro merchant demographic. Square also has been dismissed because of a perception that its customer service cannot compare to that of typical ISOs and MLSs. But customer service issues haven't stopped Square from creating a suite of products designed to reach more established, brick-and-mortar merchants – the turf of traditional payment pros.

Three popular Square offerings include:

  • Square Register: A POS system app, compatible with Apple and Android devices, that can be downloaded for free. In addition to payment acceptance, it provides analytics, sales reporting, inventory management, loyalty programs, digital receipts and staff management.
  • Square Capital: A merchant cash advance program merchants can activate via Square Register's dashboard. They receive cash upfront and pay it back over time with a fixed percentage of daily credit card receipts.
  • Square Market: An online store directory for all merchants with an existing Square account. The market allows merchants to create free, online profiles for their stores in the marketplace. They can then sell their products through the market for Square's standard rate of 2.75 percent per transaction.

The company also offers online pre-ordering, scheduling and invoicing systems, as well as offline processing so merchants can accept payments when their Internet service is down.

end of article

Alex Nouri has been in the President of EFT Direct, an acquiring and consulting firm based in Ann Arbor, Michigan, since 2000. He is the author of two imminent books on the subjects of helping merchants select an acquirer as well as helping all echelons of transaction processing industry make better decisions and streamline their operations by becoming more efficient, reach greater profitability, and prepare for future. He can be reached at alex@eft-direct.com and at (734) 477-7700.

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