It seems the company has everything it takes to succeed. It has an amazing team: it was founded by Twitter inventor Jack Dorsey and its COO is Keith Rabois, a top Silicon Valley angel and previously a top exec at PayPal, LinkedIn and Slide. It has an innovative, ambitious idea. It naturally raised gobs of money from top Silicon Valley VCs. It even has a business model!
But here’s what we don’t get about Square. Ambitious Silicon Valley startups are about disrupting dumb, slow incumbents. And few companies seem to fit that description as well as the credit card giants, who behave like a cartel that gouges customers and merchants. Cashless electronic payments has held much promise for displacing them, but that vision is a far, far cry from being realised, even today. Yet if everything works out for Square, then this will not disrupt the credit card cartel — it will entrench it. We will have even more reasons to carry plastic around and be beholden to it.
What’s more, one of the things that rescued PayPal from the brink of collapse as a startup was getting users to switch their PayPal accounts from their credit cards to their checking accounts, because credit card fees were eating PayPal alive. (PayPal’s clever gambit was to make a tiny transfer below $1 to the user’s account with a security code the user could enter to authentify their account.) Surely PayPal alum Keith Rabois realises building a business on credit cards is not healthy.
Given all this, here’s the only way we think Square makes sense over the long term: if they get rid of the dongle.
In fact, we think that’s been in the business plan for day one. We don’t think Square should get rid of the dongle now. It’s a great marketing tool. A device where people can just swipe their card and a dongle you can simply mail for free to anyone is a tremendous way to get people started on Square. They get the concept instantly. It’s one of those “ah-ha!” moments.
Startup Bump already has a way to transfer info between smartphones via the cloud by bumping them together (think a fist-bump, except with a phone in your hand). It was originally intended for trading contact info, but with the PayPal API it already takes payments. We think Square is going to have to move to a similar model at some point.
Instead of using the Square dongle to swipe their credit cards, people would transfer payments by bumping their phones together (or tapping a button or whatever), and the money would be transferred from their bank accounts, with Square taking a smaller fee than the credit card company would have.
All of a sudden, credit card companies are disrupted! Consumers and merchants win! That’s a company worth rooting for!
If so, why start with the dongle in the first place? As we said, it’s tremendous marketing. People get the value proposition much more quickly. But the biggest thing is that now, to accept payments, only one person needs to have Square for the process to work. Payments systems need two-sided adoption to work.
But a few years from now, if they have millions of users, Square will already have their customers’ financial info (Square also promises to replace loyalty cards for small businesses by tracking payments, a great way to lock in customers if it works out). Transitioning them to contactless payment is going to be much easier and cheaper than acquiring those customers with contactless payment in the first place. Merchants will still use the dongle for some people who don’t have Square, and use Square without the dongle more and more.
In his interview with us, Keith Rabois said Square is like “PayPal for the real world.” PayPal got started as a way to beam money between Palm pilots. That was an idea that was too far ahead of its time in the late 90s.
But in the late 2010s? We’re willing to bet they’re thinking about it.