How the Twitter Guy Changed Payments

It’s been almost a decade since Square piled into the merchant-acquiring industry. How much disruption did this upstart cause?

It’s late April of 2010 at automated clearing house governing body NACHA’s annual conference in the Seattle convention center. On stage before an audience of 2,000 bankers and other mostly buttoned-down types is Jack Dorsey, who co-founded social network Twitter to become an Internet superstar.

Now he has started a payments company called Square, and his new company is the object of intense curiosity among bankers, independent sales organizations, and others in the payments business.

Dorsey and Square’s chairman, Jim McKelvey, politely field questions, but mostly are vague about their plans for their upstart. Afterward, something happens that probably never happened at a payments conference before: attendees, smart phones in hand, rush up to Dorsey and ask to have their pictures taken with him (“Is It Still Hip To Be Square?” September, 2014).

At the time, this magazine’s sister publication, Digital Transactions News, obtained a comment from a payments executive who witnessed the startling scene but asked not to be named. The executive said Dorsey and his team at Square were “intelligent men who have consulted with many people in the industry and can’t be dismissed,” said the news account. “Still, he thinks Square’s Silicon Valley glitter is attracting attention out of proportion to the company’s accomplishments so far.”

“‘If the Twitter guy wasn’t involved, they would be a non-story,’” the executive concluded.

‘They’ve Built a Brand’

It turns out, however, that the Twitter guy did have a payments story to tell. Square made its first splash as the provider of a little square dongle with rounded edges for iPhones that enabled everyone from flea-market sellers to parents of Cub Scouts during popcorn drives to accept credit card payments.

The company would morph into a processor with a growing base of bigger merchants and its toes in everything from business-management software and person-to-person payments to merchant financing and cryptocurrency.

Now it has its eyes on banking, with an application pending for a Utah industrial-bank charter. Square doesn’t just provide a payments service, it offers an “ecosystem,” a word Dorsey uses repeatedly.

Thanks to its Silicon Valley genetics, its ability to bring small merchants into the card-acceptance fold, sleek marketing, and a constant stream of new or refashioned products, Square’s beacon has shone past a big industry largely invisible to consumers.

“Almost more than anybody they’ve built a brand,” says payments consultant Eric Grover, principal of Minden, Nev.-based Intrepid Ventures. “And it’s a trusted brand, it’s a powerful, very visible brand. In a café, both the waiter and the consumer know it’s Square.”

What other payments company can boast, as Dorsey did at a JPMorgan Chase & Co. investor conference in May, that one of its products—Cash App, Square’s P2P service that works in tandem with a Visa debit card—is mentioned in approximately 250 songs, mostly hip hop?

“Square’s biggest influence on acquiring has been the productization of the industry,” researcher and consultant Rick Oglesby, president of Mesa, Ariz.-based AZ Payments Group, says in an email. “Historically, and still, acquiring has been referred to as a commoditized industry, but that is less and less true every day, and that’s largely due to Square.”

‘Net Positive’

Square never has called itself an ISO, but at its core that’s what it is: a non-bank entity that signs merchants for payment card acceptance. It feeds transactions into the payment system through banks, mostly Chase. It employs the aggregator model with its smaller merchants, using its account as the merchant of record for those too small to have individual merchant accounts.

“They spurred … a re-characterization of who a merchant acquirer or card processor is,” says Jared Drieling, senior director of business intelligence at The Strawhecker Group, an Omaha, Neb.-based payments consultancy. “They do not identify themselves as a payment processor, they’re a technology company focused on the software space.”

For a long time, many ISOs viewed Square with suspicion. Square competed with them for small merchants ISOs viewed as big enough to be profitable, but it also exploited overlooked opportunities presented by micro merchants many in the acquiring business thought were too small to bother with.

In contrast to the often Byzantine pricing plans from legacy payments providers, Square offered simple, transparent pricing options, even if they weren’t necessarily the lowest rates a merchant might find. Plus, Square eschewed the traditional feet-on-the-street sales model and instead deployed an Internet-based “self-origination” model to sign sellers, the term Square uses for merchants.

Still, ISO and acquiring-industry veteran Kevin Jones, current president of the Electronic Transactions Association, the national payment-industry trade group, views Square as “a net positive for the industry.” (Square, by the way, joined the Washington, D.C.-based ETA last winter.)

“They’re laser-focused on user experience,” says Jones, who is chief executive of Celero Commerce, a payments and software firm headquartered in Nashville, Tenn. “I think that above all.”

Jones notes Square “came into an industry that had a lot of incumbents, and had a fresh perspective on electronic payments and how to simplify the process of acquiring a mechanism to take payments, and for the consumer to actually pay via credit card. That focus ushered in a group of businesses that previously were not accepting credit cards.”

Square did this through its focus on mobile payments, use of social media to connect with prospective sellers, and self-onboarding, according to Grover.

“One area which it is very clear they were pivotal in is socializing mobile commerce,” Grover says. Square wasn’t the first to do that, he adds, but “they were the ones who were normalizing it … you can’t be an acquirer today and not support mobile acceptance.”

The online-booking process, meanwhile, is another innovation that Square refined and other processors copied. Square declined comment for this story, but Dorsey said at the JPMorgan investor conference that 80% of Square’s large sellers have self on-boarded.

“Square was pivotal in the self-origination” of merchant clients, says Grover. Part and parcel of that, he adds, was that Square used a more abbreviated underwriting process than most acquirers on the theory that small merchants presented relatively lower risk.

That, too, inspired copycats. Since Square came along, other acquirers have “worked to make the merchant-underwriting experience faster, easier, kind of a painless, if not instant, really quick process,” Grover says.

Meanwhile, Square never has been reluctant to discontinue or revamp products. In 2015, it shut down Square Order just 10 months after introducing it as the replacement for an earlier product, Square Wallet. Square Order enabled users to place an order and pay for it on a mobile device, then show up later at the business—usually a coffee shop or café—to pick it up. But merchant adoption was mostly limited to coffee shops in New York and San Francisco.

One of Square’s most recent initiatives has been in the Bitcoin and cryptocurrency realm. Square is in the process of building a cryptocurrency team, and Cash App supports the buying and selling of Bitcoin. The company reported $65.5 million in Bitcoin revenue in the first quarter, but $64.7 million in Bitcoin-related expenses. How crypto services will prove to be a long-term moneymaker for Square currently is unclear.

Striking out

Indeed, while Square has hit some home runs, it’s had a few strikeouts, too. Its much-ballyhooed processing partnership with Starbucks Corp. fizzled after about three years. And last month, The Wall Street Journal disclosed that Square had misdirected numerous emailed receipts to the wrong person, compromising some consumers’ privacy. A spokesperson told the newspaper the company had made a number of changes to address the issue.

And as is the case with many Internet-based companies, some Square customers have complained that it can be hard to get a live person on the phone to answer a question or fix a problem.

The Strawhecker Group’s Drieling says one merchant told his firm that Square cut his company off after it submitted a much-higher-than-average transaction, though the merchant knew the sale was legitimate. The merchant lost a week of card sales while scrambling to find a new processor, and never received a reason from Square about the termination, he says.

And, nearly a decade after its launch and after almost four years as a publicly traded company, Square has yet to report a full-year profit on a generally accepted accounting principles basis.

But Dorsey said at the JPMorgan conference that Square’s take rate, or transaction-based profit, has been stable in recent quarters at 1.1%, and Square is getting more volume from its generally more profitable larger sellers.

‘A Growth Story’

Wall Street so far has been patient. Consultant Grover notes that Square’s market capitalization was $26 billion in late May, bigger than either of two recent merger partners, Global Payments Inc. and Total System Services Inc. (TSYS).

“To me, that says success,” Grover says. “The market is willing to give leeway. Square has a growth story, and people believe it.”

Some observers wonder how Dorsey can serve as CEO of two publicly traded companies at the same time—in addition to heading Square, he has returned to lead his original company, Twitter. But so far neither board of directors has demanded he choose just one.

As it heads into its second decade, there’s no doubt Square has ratcheted up competition in the acquiring industry.

“I would say because of Square, and many others like Square, it’s the wrong time to be dormant,” says Celero Commerce’s Jones.