Imagine that it is 2009 and the world is slowly picking itself up from the sub-prime crisis. Your business is running smoothly and you have become highly reputable at the local level and just then you get a phone call. A prospective buyer, who stays miles away from you, has shown interest in your marquee product. The product is priced somewhere around $3,000 and the transaction was going smoothly until the discussion headed towards the payments aspect. The client said that she wants to pay via her American express card but sadly, you only accept a Visa card. Your client tells you that maybe her husband might have it and she would call you back after a fortnight, when her husband returns. And you smash the table in anger and say, “God! I am about to lose the sale”.
This problem is exactly what Jim McKelvey and many of the small business owners faced. Their biggest problem was not facing Amazon as their competitor. It wasn’t finding skillful staff, negotiating the prices of real estate for expansion, or paying castigating taxes. Processing credit card payments was the headache!
This problem that Jim McKelvey faced led to the genesis of Square. By combining a classy integrated payments system with distinct conversation-triggering piece of hardware, Square, 2009, disrupted the credit card payments establishment, while making it more accessible to each small business entity. In less than even a decade, Square’s valuation, shot up north to roughly around $26.0 billion.
THE BASE BUSINESS MODEL
The idea of Square is actually quite simple. Square acts as a merchant of record for its sellers. Square would be an easy medium through which small businesses could process the credit card payments using a small dongle-style reader that could be connected to a mobile device, effectively making the device a point-of-sale system. The point-of-sale structure helps sellers or merchants with a mobile device to accept card payments, anywhere, anytime. In other words, Square holds the direct relationship with the sellers and facilitates the payment transactions, on behalf of the seller, with the payment card networks and banks. Sellers do not need to get into the hassles of complex systems, rules, and necessities of the payment industry and would only have to pay 2.75% of each transaction as a processing fee to Square.
HOW DID SQUARE BECOME A FINTECH GIANT?
“Every once in a while, a new technology, an old problem, and a big idea turn into an innovation.”-Dean Kamen.
This is exactly what happened for Jack Dorsey and McKelvey. On the hindsight, flip a decade back when McKelvey discussed the idea with Dorsey (who already had twitter in his kitty) and the latter took no time to go ahead with this idea by listing down “140 Reasons why Square would fail,” a list of every conceivable obstacle that could ring the alarm bells for his new venture. As unorthodox as it could it, every obstacle had a counterargument attached to it. The list was sent out to every possible investor in the Silicon Valley, most of whom, were intrigued by the idea. Fast track to late 2009, with the help of the prototype of the Square reader and the mobile application, Square already had $10M as a part of its Series A round, led by Khosla Ventures.
Apart from the Square Reader’s hardware and Dorsey’s leadership skills, there were two specific partnerships that helped propel Square into the mainstream. The first and the major one was a “strategic investment” from what could have been square’s biggest competitors-Visa. With this, Square ticked all the boxes without even completely entering the market.
“Square’s early success suggests that using Square and a mobile device, new types of merchants will now be able to accept payments and help grow their business via Visa’s global network with the security, speed and reliability we provide” -John Patridge, former President, Visa.
At one end, the Visa deal was going on, but on flip side, Square, itself, was taking giant steps with a massive 100,000 new users signing up for Square every month. Now, surprisingly, this growth of new members signing up was purely on the basis of word of mouth and Square did not even have a dedicated sales team till then. In Q1 of 2011 alone, Square had processed more than $66 million in transactions and expected itself to take up the traction value to an additional $200 million in Q2 of 2011. The crux of the matter was that Square actually did not need the “Visa” investment, but partnering with a potential competitor set its ground clear and ensured that the company would not face any initial hiccups. Visa’s investment also added credibility to Square’s ambitious plans as discussed previously.
FIRST STEP TOWARDS EXPANSION: SQUARE WALLET
2011 it was, Square started taking its baby steps into the world of consumer financial applications and released Square Wallet. The centrifugal idea behind Square Wallet was changing the dynamics of the market and substituting the wallet by physical debit and credit cards of the users. Users could connect their wallet to a checking account and associated card and use their wallet for everyday payments, much like any other payment companies working currently. The wallet in itself at that time wasn’t just a bold idea, but it also aligned with Dorsey’s idealistic vision of payments driven by human interaction rather than the traditional credit card mode. The wallet aimed to keep minimal obstacles. That meant everything that would give a hassle to the client, like for that matter even removing the credit card, was removed out of the picture. The Wallet also predated services that would later aim to enhance the former experience including Apple Pay and Google’s Android Pay, which came into the picture in 2014 and 2015 respectively. The Wallet project failed, but it did give a testimony about the larger vision of what Square could be as a company and its role in the rapidly changing landscape of consumer finance. Square’s aim was to ultimately provide a completely different consumer experience to every person possible.
“The plan includes growing the team, both in engineering and design, and increasing the awareness of Square, which means expanding the user base to the plumber, the piano teacher and the dog walker. As for product innovation, we will do a lot with the receipt. ‘Let’s make it interactive instead of something we throw away.” – Jack Dorsey, co-founder, Square.
Agreements with APPLE & STARBUCKS
It was 2012, and the company was marching towards glory with small hiccups here and there. The company had already sold its Square Readers at more than 20,000 retail outlets including AT&T stores, Best Buy, Radio Shacks, Staples, and Walgreen’s pharmacies. Square had understood that it was not selling only Readers to its users but they are giving them a completely new user experience. The company could have sold its Readers as a retail product and would have likely grown at a similar pace. Still, the strategic partnership with Apple is considered a masterstroke. The availability of Square Readers at Apple stores gave the emerging brand even greater credibility in the eyes of its consumers. It also elevated and aligned Square’s already strong aesthetic with Apple’s design, which by that point had already made strong gains in its shift towards its status as a lifestyle brand of consumer electronics.
In August 2012, Square managed to crack the deal with coffee retail giant Starbucks.According to the deal, Starbucks would use Square exclusively to process card payments in its 7,000 outlets. In addition to the exclusive deal, Starbucks also agreed to invest $25million in Square and Howard Schultz also received a seat on Square’s board.
The key to Square’s early success was establishing key partnerships with well-known,nationwide companies that could offer immediate access to their credit card processing model, which was then integrated into tens of thousands of physical stores.
Square Register: Because processing the payments was only half the problem solved!
“We want to take away the clutter and the paper, and get rid of the loyalty cards and get rid of the receipts. It is really, really magical. It’s something that makes the experience awesome.” -Jack Dorsey, co-founder, Square.
Maybe, a bigger problem than processing credit card payments was the fact that small businesses had little or no actionable sales analytics data. Looking at this inconvenience that small businesses faced, Square decided to launch its Register. It was essentially an I-Pad that was preloaded with the Square software. The centrifugal idea was to get rid of the entire cash register systems. The timing of the Register was also apt because by the time the Register was released; Square already had shipped more than 500,000 Readers and processed more than $1 billion in gross payments. Square wanted to redefine the entire idea of credit card payments, from the beginning till the end-and that’s what Register set out to achieve.
How did Square go on become a giant it is today? Find out in Part II. Coming Soon!
Really looking forward to the second part!