November 27, 2012
By Todd Ablowitz
If you’ve attended any acquirers’ conferences, tuned into industry news, or followed payments trends this past year, you’ve surely noticed a common topic: “Should we beware of Square?”
Square has created quite a stir by growing in just three years from a Silicon Valley startup to a disruptive payments player processing $10 billion annually and forging relationships with industry heavyweights like Visa Inc. and Starbucks Corp. It also has secured at least $350 million in financing from a “Who’s Who” list of venture capitalists: Sequoia Capital, Khosla Ventures , Kleiner Perkins Caufield & Byers, and Sir Richard Branson, to name a few. They’ve each had their fair share of financial home runs over the years. Do Google, Amazon, Cisco, and PayPal sound familiar?
So it’s surprising that there are industry consultants, who are paid to help their clients chart their future, advising them to "remain cautious," while reminding them that Square’s model is still "unproven," in the words of an infographic headed "Should Traditional Merchant Acquirers 'Beware of Square'?", which was distribututed at the end of October by The Strawhecker Group, an Omaha, Neb.-based consultancy.
It is truly shortsighted to downplay Square’s success as little more than marketing magic and dismiss its "ability to win long-term" because its business model is yet "unproven," again in the words of the infographic. Who can guarantee that any business model will continue to flourish in the future, even if it has proven successful in the past? To wait on the sidelines to see where the chips will fall is nothing more than “old thinking,” and it’s very dangerous.
Here are three flawed propositions taken from the infographic and current in the acquiring marketplace that show how that old thinking plays out with respect to Square.
"Square’s merchants are different" and make up only 2% of the U.S. merchant market. It makes perfect sense that Square set its sights on the underserved market of micro-merchants to launch its services. No one else was targeting the market because of perceived high attrition and low margins, but Square entered the market with a simple card-swipe dongle that attaches to smart phones and tablets and offers simple, easy-to-understand, and affordable processing fees. And while there are millions of untapped micro-merchants still out there, there is a great deal of evidence to indicate that Square is moving upmarket to small- and medium-size merchants, like restaurants, hair salons, physicians, law firms, and others that make up the sweet spot of profitability for acquirers.
There is close to a half billion dollars in smart money riding on Square. Those investors are betting on the idea that Square can innovate its way into a huge market position far beyond its current market share
"Square isn’t appropriate for all merchant sizes." Square is already proving that idea wrong now that Starbucks is offering Square Wallet as a way to pay at 7,000 stores across the U.S. Square also is set to process credit and debit transactions for Starbucks to the tune of $6 billion annually, by some estimates.
"Square terminals don’t offer the feature functionality many traditional merchants rely on." Square Register currently accepts payments, links to a cash drawer, tracks inventory and sales, and allows consumers to open a tab. And Square recently announced ticket printing functionality for restaurants. Considering how many merchants rely on terminals, that’s not too shabby. I’d say Square is just getting started, so even if they don’t have some functionality now, you can bet they will before you know it.
Now for a couple of important questions, with answers.
So, should we beware of Square? Absolutely. When dealing with industry disrupters it is critical to place your bets and innovate in ways that fit your strengths.
Does it mean matching Square’s strategy? No way. Square is attacking the market with a horizontal strategy that targets a broad and diverse merchant base, using an automated approach. Acquirers, who know their customers, will be better served by targeting vertical markets where they have greater knowledge and experience and can leverage their sales forces to clearly articulate value.
What’s clear is that the outlook for payments isn’t based only on the ability to accept and process card transactions. It is focused on technology solutions that enhance the customer experience and drive bottom-line results for merchants. The equation likely includes cloud-based point-of-sale systems that offer end-to-end business solutions.
The good news is there is plenty of room for acquirers that can zero in on their target markets with the right technology and can effectively build relationships, provide good service, and prove greater value. Regardless of where Square finally nets out, the sooner payments companies begin managing for the future, rather than waiting on the sidelines, the more likely it is they will be a meaningful player for many years to come.
On the other hand, if you are a payments company that has your sales reps schlepping around trying to sell terminals and offering a lower rate to any merchant that crosses your path, then I suggest you remain “cautious” by selling your portfolio and retiring.
Todd Ablowitz is president of Double Diamond Group, a consulting firm based in Centennial, Colo. Reach him at firstname.lastname@example.org.
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