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Summary:

Square, the breakout mobile payment hit, faces more competition from deep-pocketed competitors. But the company is content to craft its own commerce tools without opening up an API or striking big partnerships. Square’s COO Keith Rabois explains how it will win by going solo.

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Mobile payment start-up Square has built a huge following in part by appealing to artisans and creators of hand crafted products. But the company is not just serving those merchants, it’s almost built in their image. The company has pushed a very design-focused product that has an almost artistic approach to commerce. The service is built almost entirely in-house without any help from outsiders. And it is getting picked up by merchants largely through word of mouth instead of a big sales team.

Even with growing competition from some well-funded companies, Square hasn’t slowed down at all. It is now processing $5 billion on an annualized rate. The company is up to 300 employees and has taken over an entire floor of the old San Francisco Chronicle building, giving it room to add another 150 people. And it’s reportedly raising $250 million at a possible $4 billion valuation.

But the rivals keep circling, looking for ways to eat into Square’s growth. PayPal launched PayPal Here, while VeriFone rolled out SAIL, even going so far as to copy wholesale portions of Square’s user agreement. Groupon is reportedly testing a payment tool that undercuts Square’s fees while Intuit, SalesVu, PayAnywhere and others are also looking at putting the squeeze on Square.

I sat down with Square’s chief operating officer Keith Rabois to talk about where Square is now, where it’s headed and how it expects to compete as the competition closes in. He talked about how the company is not interested in a piecing together a solution, nor is it looking at hiring a sales staff anytime soon. And it’s not making any immediate moves to address the online sales channel for merchants. He said Square is lifting sales for businesses by double digits and a lot more in some cases. And to all the competitors, he said, it takes more than just a press release to compete.

This interview was edited for clarity and space.

Ryan: How do you feel now that Square is walking around with a target on its back?

Keith: There are more and more people obviously in financial services and in technology who are interested in what Square is doing because we have had a lot of market traction. We’ve established a high affinity brand and we’re helping merchants. That obviously attracts interests. That said, what we do is complicated and to do it well is incredibly complicated. It’s not as easy as saying we’re going to cut and paste various things and you have Square.

Ryan: Are you planning to target medium or large-sized businesses in addition to smaller merchants?

Keith: If you’re a sole proprietor who opened a business because you have passion about a craft and because you like the relationship and dialogue with your customers, you can’t throw a person at IT. There’s no one to install these terminals. There’s no one to look at your bank statements, study them and optimize them. At some level of scale, a business has enough professionalization that they subdivide so they have a separate HR professional and you have a separate IT professional and you have a separate finance professional.

Below 100 employees, you generally can’t allocate people that way, so we have we have an immense value proposition. Over time, I suspect we will innovate for large businesses, too, but today that’s a pretty big market. For example, I believe if you look at the U.S. commerce department they estimate that sales for businesses with 20 employees or less is about $22 trillion a year.

Ryan: With all the things you need to do, how do you prioritize? Deals, loyalty, discovery, all of the above?

Keith: We think there is one narrative, one story. We don’t think of them as separate. It’s how do we make life better for business people, entrepreneurs and really look at what are the sources of friction on both sides of the counter — so, consumer friction as well as merchant friction, and how do you eradicate them. You’re right, we can’t do them all at once. We have to sequence some things, but there is a consistent narrative, which is reinventing commerce to make the commercial experience better, more human, more enjoyable and delightful.

Ryan: Your competitors all think there is something they can do better. They’ll concede that you’ve been successful but that they’re going to cut you off at the pass. What do you think when they take aim at you and feel that they will have a faster path to a more robust set of tools, whether it’s in house, or buying a bunch of companies or opening up with APIs?

Keith: I’ve yet to see in technology a company following someone else’s strategy that jumps ahead. Ultimately you have to have a vision of what you’re building and a proprietary approach. Leveraging a competitive advantage and just following what other people do never yields success. A reader is a small piece of what we do. Square can’t be distilled by cutting and pasting or doing a Zynga clone of our website.

Ryan: Other competitors will argue they have more tools, like better analytics, business software or deals and loyalty. Do you feel like you can do this all in-house?

Keith: Yes, absolutely. I think there’s strength in crafting an entire experience. You can optimize it. You don’t have these component misfit problems. Generally, any time you put together component pieces, you are imposing friction on your users. If you’ve bought an audio system for your house, trying to set that up is a major deterrent. Trying to figure out which component goes with which component, it can deter people from actually buying the best new systems. If you craft an experience end-to-end, it just works out of the box.

Ryan: I hear from other companies who say they’ve gotten Square converts because they offer more tools.

Keith: Let’s be real! Is there a PayPal Here user in America that’s live? If you’ve found one, let us know. Ask any of those people for actual users you can talk to. It’s really easy to put out a press release and say, hey, we’ve got some new features. The market will speak for itself.

Ryan: How long before people have these tools? It seems like you have the beginnings of a lot of them, but the depth isn’t there yet.

Keith: I think the tools are pretty compelling. You should talk to our users. They will tell you how it’s improved their business, how it’s increased their sales. Increasing sales by 15 percent for a business is the difference between paying rent and not, or being able to hire a new employee or not. So, we’re already doing that. We’re already lifting sales by double digits across the businesses that adopt Square and sometimes, it’s greater than double digits.

Ryan: Are the reports that you’re raising $250 million accurate?

Keith: All I will say is that there are a lot of people who invest for a living who have always been interested in Square.

Rabois at Square’s San Francisco office

Ryan: Going forward, what’s the relationship between Pay with Square, your cloud-based payment app, and the main Square experience? Are you going to be more of a consumer brand or more of a B2B tools company.

Keith: I think it’s both. Apple is a consumer and an enterprise brand. There’s no inherent tension between the two. Pay with Square is a consumer application that powers merchant success. People who pay with Square come back to your business more frequently. And we have a directory that exposes businesses to be discovered and that generates new customers, so it’s both a value proposition for the consumer and a great business tool for the merchant. In my ideal world, using Square to accept payments is just as easy as using Facebook. Actually, it should be easier because the privacy setting complexity isn’t part of it.

The vision of Pay with Square is simply a one-click experience for the real world. So imagine you have an iTunes account that allows you to go everywhere and allows you to buy things because you can afford them and you don’t focus on the mechanics of paying at all. You say put it on Ryan or put it on Keith. And so you have this invisible account in the background that just takes care of things.

Ryan: When I look for places to Pay with Square, it still seems limited.

Keith: We are a little like Yelp or Open Table, where obviously, the more merchants you have in a geographic region, the better it is for consumers. That’s not surprising. I think you will find in most NFL cities, the cities with NFL teams, increasingly you see Pay with Square merchants everywhere.

Ryan: What is your plan to accelerate that? Is there a sales team?

Keith: We do not have a sales team. I think what we found is that Square is such an amazing experience that when people tried it in the real world, they’re actually really impressed. And they actually ask for it. “What is that and where can I get one?” So that’s the best set of customers you can have. They actually proselytize for us. We’ve invested a lot in retail so we’re now available for sale in over 20,700 different locations in the United States. From Apple to Best Buyto Walmart, Target, FedEx, Staples and Office Depot, and that’s important.

Ryan: But people who use a mobile wallet — they want to use it at small stores and big stores. Is your retail network at this point too incomplete to be really useful to consumers?

Keith: Most Americans use multiple forms of payment every week. I don’t think Pay with Square has to be replacing all forms of payment immediately. But the macro trend is once you try the product, you’re going to want to use it in more and more places, and you’re not going to go backwards toward paper, and so our first job and mission is to get as many people to try it. And that they’re delighted and stick with it, sort of like Facebook engagement. Facebook has this massive engagement compared to every other website because people use Facebook and they really enjoy the experience. Pay with Square needs to work the same way.

I think secondly, when I have that experience, I’m going to go into the bigger businesses and ask, “Why the hell don’t you take Pay with Square?” It’s like how people do with American Express. There are a lot of people who prefer to use their AmEx card. That is why large retailers pay a higher discount rate to AmEx because there are Americans who prefer to use their AmEx card. As long as Americans prefer to use Pay with Square, larger businesses will definitely start accepting it.

Ryan: Will Square be in-store only, or do you have online ambitions as well?

Keith: Increasingly many business are at least selling some of their wares through an alternative channel. So that’s a macro trend. However, we started in the real world. We believe in the real world, which still accounts for 95-96 percent of retail commerce, compared to the online world, which is roughly 5-6 percent. So, I think the focus of Square is correctly in the real world.

  1. Why would a square customer demand to pay with Square as a big retail store? The experience is no different than if they were using any other card reader.

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  2. Exactly. I was going to respond precisely to that comment. I agree with most of what Rabois said except this where it contradicted his previous statement on small business focus. I am sure Square is incented by the increase in basket size on bigger retailers where they will actually turn a profit compared to the small mom and pop shops. But the question “Why you won’t take Square” is mostly asked (and I am at fault) when either I am forced to transact with Cash, or the merchant complains about the broken card acceptance rules at their end. This is still mostly cab drivers (talked a Cincinnati Cabbie in to going to Square because he was paying over 5% for accepting CC) and other small merchants who are routinely abused by the current framework. But Square has a tough time if they were going to convince the top 100 retailers in to welcoming it as they have little upside. And for us consumers, there is little upside in advocating Square there, as we are already paying with plastic.

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    1. Yes, but the experience is one where you don’t pull out the plastic if you are paying with square where the merchant accepts your payment with square. Your face and name confirmation is all that’s needed to make purchase complete.

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  3. I don’t think either of you actually know what the product “Pay with Square” is. You are both thinking of the Square card reader product. “Pay with Square” is payments through your mobile phone; no credit card necessary. Imagine going into Wal-Mart and telling them to put it on your tab and not even having to pull your wallet out. That is an experience that customers will demand.

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  4. Srinivas Vadhri Friday, June 1, 2012

    They need to go beyond just “pay it johnson” or any other name – they need to combine with Merchant’s offers/coupons etc. I personally have a problem if it is just a pass phrase or unique string, that too uttered over the counter. Imagine this in a busy small business scenario like a restaurant .. how does one track or reconcile? the concept is cool .. but not practical on a day/day basis

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  5. I’m curious about the quote “I believe if you look at the U.S. commerce department they estimate that sales for businesses with 20 employees or less is about $22 trillion a year.” which I find a little hard to believe given the estimated total US GDP for 2012 is $15.6 trillion (wikipedia link: http://dj.lk/KJXkjx), maybe it was $2.2 trillion?

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    1. Jonas Lamis Tuesday, June 5, 2012

      Seems much more reasonable to me. If Square is able to capture 10% of that market ($220B) and has a 1% gross margin on transaction volume, it could see gross profit of several billion someday.

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  6. DeWayne A. Nelon Monday, June 4, 2012

    For an enterprise grade solution have a look at http://www.corduro.com

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  7. If you have a business, please stay away from Square, Inc. for processing credit cards. They are the folks with the cute little ad showing how easy it is to just swipe a credit card with your iPhone or Android. What the ad does not say is they will hold up payment of funds to you for 30 days or more for no reason whatsoever. It is impossible to reach them by telephone. The email help system is a joke. These folks are crooks. Stay away.

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