Despite Its Recent Troubles, Ignoring Square Is a Risky Move for Rivals, Experts Argue

Do competing acquirers run a significant risk if they ignore the way Square Inc. operates? Some experts are now saying they do, though you wouldn’t think so in the light of recent events.

When 6-year-old Square went public in November, the result was bloody. On the first day of trading, the market chopped what had been a $6 billion private valuation to $4.7 billion, and in the weeks that followed the carnage only worsened. By mid-January, the company was worth $3.32 billion.

But since then the San Francisco-based mobile point-of-sale processor’s prospects have brightened. Last month, it issued its first quarterly earnings report as a public company, indicating a widening loss but also reporting $10.2 billion in gross payment volume for the fourth quarter, up 45% in one year, on some 2 million merchants. At mid-day Friday, the stock was trading at $14.40 a share, good for a market cap of $4.65 billion.

And now some experts are arguing that Square in its short history has turned itself into a force without equal in the acquiring industry. “Square really doesn’t have any close competitors,” says Rick Oglesby, president of AZ Payments Group LLC and a senior analyst for Centennial, Colo.-based Double Diamond Payments Research, in an email message.

How Square differs—radically—from traditional acquiring operations becomes apparent in an article posted this week by First Annapolis Consulting Inc., Annapolis, Md. Two ways involve advertising and branding. Unlike all other merchant processors, which typically keep their names in the background, Square has heavily promoted its name and its service. At the same time, it has also advertised directly to merchants, eschewing the army of independent sales organizations used by most processors.

Square spends 13% of its net revenue on advertising, in stark contrast to the 1.7% the rest of the industry spends, on average, the First Annapolis article says.

The result is that half of Square’s merchant leads come to the company without any outreach by the company, according to the article. “They’re coming through self-discovery and self-enrollment, which is more like a consumer-product company,” Marc Abbey, a managing partner at First Annapolis and co-author of the article, tells Digital Transactions News.

Competing processors ignore this advertising and branding strategy at their peril. “Square built this brand rapidly and with a media savvy that we tend not to associate with acquirers, and make no mistake, it is a competitive weapon,” Abbey and his co-author, First Annapolis senior manager Brooke Ybarra, point out in their piece, entitled, “Strategic Conclusions Traditional Acquirers Can Draw from Square.”

The authors say Square has also built a formidable advantage in smoothing out the process by which merchants enroll and use both the basic processing service and add-on services, such as merchant cash advances and so-called instant deposits. Most recently, Square rolled out a payroll service, which is available to merchants whether or not they use Square for processing.

This use of technology to make enrollment and usage quick and easy is far more important than the initial advantage Square staked out with its iconic mobile card reader, an item that was soon replicated by innumerable competitors, the authors say.

Oglesby agrees. “The dongle isn’t the source of Square’s advantage, and it never has been,” he notes. “Legacy acquiring practices were and still are anything but frictionless. Square developed frictionless underwriting and account-activation processes, as well as new processes to ease how merchants can access other software and services.”

How Square itself sees these advantages is hard to say, as the company did not respond to a request for comment on the First Annapolis article. But other acquirers shouldn’t emulate Square, Abbey argues, so much as pay attention to the risks it poses to their own position in the market. “The key lesson is that thinking about acquiring strategy in traditional ways is quite risky,” he says.

He cites Square’s branding expertise as an example. “Acquirers don’t think about branding—ever,” he says. “You don’t have to have the same branding strategy Square does to think about branding.”