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Jack Dorsey on Square, How It Works & Why It Disrupts

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Square CEO & Co-Founder Jack Dorsey. Photo by Bijan Sabet.

In February 2009, Jim McKelvey, who’d left the technology business and became a glass blower, lost an order because he couldn’t accept a credit card from a customer who wanted to buy his creation. He called his friend and Twitter co-founder Jack Dorsey. The two talked about lost opportunities in the current payment ecosystem that is dominated by giants such as Visa, MasterCard and PayPal.

Within days McKelvey left St. Louis, moved to San Francisco to team up with Dorsey and Tristan O’Tierney and start working on what would eventually become Square. It took them a month to cobble together a working prototype. Dorsey worked on the back-end server, O’Tierney on the iPhone app and McKelvey worked on the hardware and on establishing relationships with payment partners.

“We went through the whole payments process and worked on designing a brand-new (person-to-person) payment system,” said Dorsey in a conversation earlier today. The San Francisco-based startup today came out of stealth with a tweet by Dorsey.

What Is Square?

It’s essentially a small magnetic reader that plugs into the headphone jack of an iPhone. When a credit card (or a debit card) is swiped through the reader, it reads the data and converts it into an audio signal. The microphone picks up the audio, sends it through the processors and then is routed to Square’s software application on the iPhone. From there the encrypted data is transmitted using either Wi-Fi (for iPod touch) or a 3G Internet connection to back-end severs, which in turn communicate with the payment networks to complete the transactions.

“We don’t store any information on the devices,” Dorsey said. And because this tiny white reader, which is small enough to hook up on a keychain, uses the headphone jack, Square can work with any device: Android, BlackBerry, Symbian Phones and even computers. “As long as we have software on that device, our reader works,” said Dorsey. Right now, they only have software for the iPhone & iPod touch. I have seen Square working at Dorsey’s café, Sightglass (my new favorite in San Francisco), and it works as advertised.

Who’s Square For?

When I asked Jack if this was a tool and a service for merchants or consumers, he answered “for both.” Dorsey has big ambitions and wants to enable a people-to-people payment system that marries the convenience of “plastic” and “mobile devices” for everyday transactions. He noted that often on Craigslist you buy something that costs a few hundred dollars -– say, a couch. Carrying that much cash for a purchase can be a risky. On the other hand, if the seller has a Square credit card reader and the Square app installed on either an iPhone (or an iPod touch), then she can easily accept credit cards.

Square owners are authenticated and attached to a bank account, much like PayPal. Dorsey said the company is working hard to reduce the time of authentication to a few minutes from a couple of days. The rest of the payment process is pretty similar to PayPal. You get an SMS and an email with confirmation and the details.

While I applaud the idea of everyone owning a Square device, the hurdles are manifold. Square would need to support many different devices. Having followed the wireless industry long enough, I can tell you that building and supporting an application for different platforms is as tough as climbing a straight wall of rock.

In comparison, merchant adoption of Square would be a no-brainer. When I visited India, I came across pizza deliverymen and grocery store delivery folks who carried a wireless-enabled credit card machine, which essentially did what Square does. In cities like New York, it is common to find taxicabs with wireless-enabled card readers. Square takes it one step further and turns any wireless device into a card reader.

Why Square Exists & Who Should Be Worried

I think that this is truly disruptive. The reason Square exists is because of three macro trends: the pervasiveness of the mobile Internet, the increase in the use of electronic payment systems and most importantly, the availability of low-cost, always-on computers (aka smartphones) that allow sophisticated software to conduct complex tasks on the go.

The marriage of computing and connectivity without the shackles of being tethered to a location is one of the biggest disruptive forces of modern times. It is (and will continue) to redefine business models, for decades.  Square is simply riding these waves.

My view is that Square (or something like Square) is going to disrupt the businesses of companies such as VeriFone and Symbol, a division of Motorola that makes point-of-sale devices. Verifone makes a $900 wireless credit card terminal vs. Square, which runs on a $299 iPod touch. I rest my case. Will Square (or another Square-type company) be a success tomorrow? Probably not! But in a few years, the sheer economics of it is going to turn the tide against the dedicated hardware makers.

Dorsey, who was careful to stay away from naming his competitors, said his company’s focus is on software and making software do complex things. The software may add facial recognition capabilities, thus making the transaction process even more secure and painless.

What’s Next?

Square’s potential is such that the company is said to have raised about $10 million in funding from Khosla Ventures and several angels, including many Hollywood stars. Gideon Yu, former CFO of Facebook and now a partner at Khosla Ventures, is the one who invested in Square. Various sources in Silicon Valley attest that this has been a much sought-after deal for venture capitalists.

Many of them will probably have a chance to invest in this company. For Square, if it truly wants to deliver on its ambitions, will need more than just luck –- it will need capital. And there is no denying that the challenges facing Square are many. But the simplicity of the idea, the audacity of the company’s dream and the convergence of diverse technology trends make Square a company to watch.

111 Responses to “Jack Dorsey on Square, How It Works & Why It Disrupts”

  1. Well, the credit card form factor has remained the same or has changed slightly since its evolution. In the context of today’s e-/m-commerce the same[cards] may not hold true and hence SQUARE instead of trying to build a peripheral around cards should have designed a new “One Interface” physical or electronic.

  2. Has it occurred to anyone that an unscrupulous person could “accidently” bring up a sound recorder app and record the audio from the dongle, then sell it on the internet or play it into another device that has the Square app installed.

    This square app encrypts the data. It should take about 12 hours for some bright hacker to either hack into the Square software or build an app from scratch that will convert the audio file to a text file that contains all the information from the mag strip.

    Of course they will need the dongle. Wait I have a MP3 to cassette adaptor in my car that has a read head and an audio plug… I wonder…

  3. What dissappoints me about this – the backend is still going through the oligopoly of Visa/MC. When I hear “p2p” and “payment” in the same sentence, my hope is for something as simple and costless as handing over cash. We’re starting to see that in Africa where mobile carriers are building their own transaction-processing backends. But can’t there be some more open way for processing these payments?

  4. Julian Gan

    I attended a training by professional trainer Roger Konopasek recently. I guess what he said is true. We live in an age of disruption. If you fail to change and adapt, someone else will eat your lunch.

    I believe square has the potential to change the way people do business, especially Consumer-to-Consumer. People can just make purchases from each other as consumers or small business owners. However, the smartest thing to do for the developers of Square is to find a partner (like Apple).

  5. Thanks @om for this good in-depth article about Square and exploring this venture, the idea. Much better than the +4 from TC.

    I agree that this one has potential some might not see (my comment from yesterday ). Sure, it builds on top of a technology platform and can be accused to be a feature. But that doesn’t stop people to innovate and make existing processes more convenient, tear down the one or two walls, and lower the barriers of entry to a price of an iPhone/iPodTouch.

    It has lots of markets and applications, research reports always focus on B2C, but I have yet to see numbers in the P2P market (flee market, street stand (hot dog anybody?), selling T-Shirts/merchandise for onetime events).

    Square will have its success.

    PS: This again proves, that innovation and entrepreneurship is nothing about leap frogging (that is R&D). It is about constant improvement, iteration, changing the concept and approach, and misusing existing stuff.

  6. Glenn F.

    Strangely, neither the article nor the comments mention a couple other clever bits.

    The reason to have a physical magnetic stripe reader is that card issuers and processors give merchants a far better rate when the physical card is present than if a card number is typed in. With this system, there is apparently no way to enter a card (I may be wrong), or it may be required to flag manual entries separately, to be charged differently

    These guys could have written an image-processing library that would do OCR of a card’s numbers, too, and all smartphones could have handled that. Less hardware. But I assume the reason they didn’t is that it’s better still to do a physical swipe. With the card in hand, and a physical swipe, the merchant can enter the three-digit security code on the back, too.

    In one of the illustrations on Square’s site, a signature is shown on a receipt. So I wonder if the app also allows someone to do a “touch” based signature. If so, that provides an even better rate: card present plus signature = the lowest fees. (Even better would be that the merchant snaps a picture of a buyer which would be stored at Square until the time for a chargeback on a transaction had passed.)

  7. uglywomansguide

    I’ve had a small business for 20+ years. I’d be nervous as a cat with a merchant that whipped out his cell phone to process my credit card transaction. Color me old-fashioned, but I think this opens the door to serious security issues.

    And on another note, is cash really becoming that archaic? Is that whole “payment for all debts, public and private” now just an antiquated notion?


    • So you’d be nervous to give out your credit card (which you already give to waiters all the time) that’s backed with fraud protection by the credit card companies, but would gladly pay with handfuls of cash that come with no protection from being mugged whatsoever?

      Cash is considerably more insecure. If someone steals my credit card, I cancel it and fraudulent charges are refunded. Cash is gone for good…

  8. What about adhering PCI-DSS requirements/standards? In other words, as a consumer how would I know the card will not be skimmed? In addition how will it be able to read the EMV chips which are mandatory in the European region?

    Square, it’s a great idea, but many hurtles to overcome.

    • les madras

      This is not a “card-present” transaction. no different from typing in your credit card number on a computer screen. So no security requirements. The corresponding merchant discounts will be high owing to the risk profile.

      Overall, i see no benefit to the dongle except to soothe consumers.

  9. As a customer how do I know the iPhone is not jail broken and runs a little app which records my data?
    I for one do not want to hand my credit card to anyone. If I buy something over the net or phone I use a temp credit card number which just has enough money on it to pay for the transaction. I would do it in a restaurant if I could.
    As a customer I want an iPhone app which creates an temp number with enough money to complete the transaction which I can “send” to the other apps for completion.
    This looks more like a sellers solution, with no improvements for the buyer.

    • “I would do it in a restaurant if I could.”

      But you don’t/can’t, so there’s really no difference here. Besides, you’re already covered by the credit card company for fraud or malicious use.

      • Why should I be stuck with today’s business model?
        Besides I’m lazy. I try to avoid problems before they might occur. Last time I checked the credit card company would not reimburse me for my time.

  10. While I agree on the potential of a person to person payment system, I cant see why it cannot be done with a simple app where you key in the credit card number. Why the swipe device?

    • 16 digits – do you have your favorite credit card’s 16 digits memorized? And can you input them on an iPhone (successfully) in under 3 seconds? Probably 99.9% of the public does not – could not.

      I still think the security risks of this outweigh the benefits at this time. I would also like to see someone come up with an OpenID-type solution so that I am not giving someone my CC information which they will store on a very personal and very portable device.

  11. Luke Mackay

    What’s the average churn rate for POS? I seem to remember shops only refit every 7 years or so on average? But within that timescale I can see this having a huge impact for sellers. Obviously the consumer adoption for the likes of Craigslist will be massively beneficial to driving this change with traditional retailers.

    Once Smartphones become cheapers and 3G broadbrand is bedded down in developing markets – across Africa for example – I can also see Square becoming gamechanger with a positive social impact.

    Will be wathing with interest.

  12. I don’t get why you need hardware and/or a card reader?
    Just type in the number into an app?

    Ultimately we need to move toward a UID and PIN for all transactions. Europe is way ahead of the U.S. in this factor– not only with financial transactions– but also stored personal medical information.

    I think there a couple of tough issues right now:

    1.) Developing a standardized UID (an “owner” of these) will be a tough nut to crack– I think eventually email addresses will go away– maybe just your mobile number will become your universal ID.

    2.) Payment systems are a mess. Everyone wants to charge for access these pipes from the credit companies, wireless carriers, to the banks. We need to open this system up and make transactions as easy as handing over paper and coins.

  13. Daniel Wagner-Hall

    While this is very cool, what happens when someone walks up to me in the street with a knife/gun and an iPod, and makes me pay him $10000? Surely the system can’t be 100% traceable and trackable — there must be ways around identifying the recipient somehow?

  14. Gabriel Irons

    As the son of a business owner, I can tell you that the struggle to accept credit cards is a painful, expensive process. The readers cost money, and then you need to pay the companies outlandish fees per swipe – they get away with all this, of course, because strong companies have enough profit to make the payments, and those who don’t… well they won’t stay in business long enough to complain.

    Linking this idea, as Alec noted, to more information such as open ID and purchase information transmitted in the swipe would be wonderful!

    Just like what Google Voice did for phones, this will do for credit cards – it’s amusing see how the big companies will scramble!

  15. I think phone device manufacturers are its competitors – iPhone or Android could easily do what Square can do. this is just a card reader. We had similar idea of having a card reader attached to a computer keyboard. It is only matter of time why Apple would not offer a simple card reader option to iPhone buyers so that they take CC.

    Once you swipe the CC, all you need is a Gateway, like PayPal, to process the card.

    the receipt analysis seems the only unique thing in this. Rest seems to be a good idea, packaged well.

  16. John C. Randolph

    This strikes me as a very clever way to address an immediate need, but it also seems to me that the physical card is a relic. We really should just carry the equivalent in our iPhones as an account number, pin and the appropriate crypto keys to protect them.

  17. I see the tremendous value is in its way to bridge customers’ in-store experiences with their online experiences.

    This is a great innovation that will send the dinosaur POS to its end and free up, enlighten today’s retailers who are so hands-tied to the stone-aged POS that prevents them competing with their online peers.

    For example, BestBuy knows everything you buy and predicts well what you will buy because when you check out, you told them all your personal details.

    But today’s POS can’t capture the valuable customer information and that puts brick-n-mortar retailers at an disadvantage to engage and stay in touch with their clients any time.

    A LOT of innovation will happen for sure if today’s retail stores are freed from the antique POS systems. For example:

    And retailers have a better way to reward loyal customers.

    I can go on and on, this will drive a lot of innovation.

    Way to go, guys!

    • Think of the mag stripe as transitional: it’s hard to get many people to think a new thought, so you feed them an old thought in a convenient package until you have them hooked!

      adoption + (something like Bump) – mag stripes = World Domination!


      • Gabriel Irons

        You would be astonished what kind of damage and punishment a customer can subject ordinary items to. Ever notice how the keypads on ATMs are practically armor-plated? That’s why.

        So this dongle needs to be strong enough to withstand a forceful card swipe, dropping, torque, shear forces, and a myriad of other stresses that it might incur while plugged into an iPhone.

        The good news is that, Colin, a simple pair of tweezers could remove a stuck plug, if those are your fears. Chances are also good that there would be wires attached to a damaged plug, which you could pull.

        The better news is that the image they are using in this blog is clearly a prototype – commercial versions would obviously be stronger and probably contain several measures against wear and tear.

    • @Gabriel ATMs are meant for public usage. It’s vulnerable to abuse by people since ‘noone’ owns it in particular. You don’t pay for the damages if you were to thump your fists on the ATM screen. However, if you mistreat the dongle or the phone, you sure do have to buy a new one yourself.

      Also, it fits in pretty much the same way as a regular headphone jacket. So the risks are pretty much the same as those for the headphone.

      Therefore, again, what heavy use?

      • Gabriel Irons

        An ATM was probably a bad example. Perhaps the keypads found at gas stations and convenience stores, for you to enter your PIN number? They are similarly protected with a thick layer of rubber and a nearly bulletproof screen. I have watched customers take the stylus from those pinpad displays and literally stab the screen with the stylus clutched in a fist – if you believe that customers will be even marginally gentle with things, you are wrong indeed. This is less because of the ‘heavy use’ and more because of the ‘constant use’ aspect. If the chance of someone accidentally smacking their purse or hand against the Square (generating dangerous amounts of torque, judging by the prototype up there) is even 1/10.000, then it will probably happen within a business’ first week open.

        If you get a chance, take a look at the stoves that restaurants use. They look like they could withstand a small bomb, and they are like that because of the constant use and abuse that the business requires of them. This is a general rule that can be applied to most if not all industrial grade items, they are built to crazy high durability standards.

        Another explanation would be that a pinpad breaking or malfunctioning would disrupt a checkout line, and some businesses may only have one – they depend on this POS for their sales, and without it they might as well be closed. Business owners demand high performance out of their electronics, and we can expect the same out of a production model for the Square.

        From an engineer’s point of view, the design is beautifully simple – which leaves plenty of room for insulation, reinforcement, and padding. From a design point of view, this will be plugged into highly mobile iPhones and laptops – therefore it will probably stay small and portable. I predict it will become tapered and sleek, both to prevent accidental breakage and to make it appear more ‘one’ with its partner electronics.

    • Jonathan S.

      Well that is not actually a phone in the photo above, it is an iTouch, and the jack is on the bottom right of it. But regardless I think it is an awesome device and it is essentially an all-in-one Point Of Sale system, and the most convenient and user friendly one at that. I would love to use this device and was actually waiting for someone to come out with one as soon as I saw those credit card terminal apps popping up in the iTunes App store. I think its a great idea and I’m also impressed they decided to make an attachment using the audio jack, pretty cool stuff. I’ll definitely have my eye on this venture.

    • Jonathan S.

      Well that is not actually an iphone in the photo above, it is an iTouch, and the jack is on the bottom right of it, the iPhone’s is at the top left. But regardless I think it is an awesome device and it is essentially an all-in-one Point Of Sale system, and the most convenient and user friendly one at that. I would love to use this device and was actually waiting for someone to come out with one as soon as I saw those credit card terminal apps popping up in the iTunes App store. I think its a great idea and I’m also impressed they decided to make an attachment using the audio jack, pretty cool stuff. I’ll definitely have my eye on this venture.

  18. dean kakridas

    I would be particularly interested in how Square could provide a simple and seamless solution that enables a way to do expense reporting automatically through mobile credit card transactions. If your mobile could capture all of your business trip transactions and either, in realtime or batch mode, dump them into a corporate expense system, that would be a huge time saver for the employee and a huge cost savings to the employer.

  19. Don’t know why they would spend resources working on a hardware attachment. Why not try to come up with a totally software app solution that allows easy financial transactions with any smart phone? That is where the world will be sooner rather than later.

      • Why not just hand your credit card to an iPhone merchant and let them type the numbers into a web page? The faux security that comes from dedicated hardware will be completely lost when the hardware is in the hands of any random hacker.

        How will you know that they aren’t copying your credit card for latter use, or just selling the card info? Because of the special hardware/software from square?

      • Roshan Shrestha

        I myself would not trust my credit card with any random Square reader. I wish credit card companies would come up with a card that generates temporary number with credit limits, like I can do at many credit company web sites – maybe something like the hardware security tokens.

        Another idea, and maybe it already exists, is an app (e.g., iPhone app) from my bank that can generate a temporary credit card number that I can “beam” to the vendor’s iPhone app – no need for a hardware swipe.

  20. Srinagesh Eranki

    I guess people to people commerce is the sweet spot. Mobility & ubiquity (assuming acceptance from growing number of mobile devices) is where it’ll trump PayPal. Not directly competing with major credit card companies is a big plus.

  21. What I would really like to see is this digital receipt idea taken further. If my card number could be securely tied to an account somewhere, open id style and opt-in of course, then the swipe could produce a digital receipt in a standardized format. This receipt could then be automatically sent to Mint, my email, my accountant, the accounting dept. if it’s a company card, or wherever the owner of the card chooses.

    This would be awesome for keeping track of my purchases on something like Mint. Right now, Mint guesses at what I bought, based on the seller ID, but it’s often inaccurate since some retailers sell a wide variety of things (e.g. convenience stores). Also, I often will buy the same product at different stores, but they are classified differently by Mint. If it had the actual receipts from each transaction, Mint could show me spending history on a per-product level without guessing.

    • Closer inspection of their site (i.e. actually reading it) reveals that they appear to do the whole e-receipt thing pretty well; several other nifty security features as well (picture ID!). All that’s left is a standardized format and adoption.

      • Taylor L.

        It’s nice to see Mr.Dorsey innovating something new again.. Surprisingly it’s far more different than his “twitter” inspired work.

        Squareup is something that should have been done years ago, finally its on the way for a skyrocketing release.

        The only caveats here is will its availability only be hindered by iPhone only? Hopefully that’s not the case. And the bullproof security users are clamoring for?

    • I agree… the implications of this are going to be interesting to say the least. I am looking forward to the changes and how it will force the incumbents to adapt/change. It is fun to see a young company cause upheavals.

      • What’s interesting is that this sort of system isn’t in place already, established by the existing companies. This looks like it will become a classic example of how disruption has to come from a small, outside company. Large companies really need to learn how to take advantage of the startup model.

    • This magnetic dongle is kludge that is doomed to fail.

      The nexgen of cc will have RFID — and apple already has patents an enhanced version of RFID for it’s nexgen iPhone/itouch (and other handset vendors are certain to try & catchup to apple) … In fact it is just as plausible to imagine that the cc function could also be embeded in the customers’ handsets themselves (eg japan) – which would make RFID smartphone an end-to-end solution for both the merchant & his customer.

      If this guy had bothered to think through his business model, then he would’ve realized that an OEM model (with an accessory vendir) would have given him a more flexible position in the value-chain: currently he is directly exposed to large-scale changes in the payment environment.

      Alternatively he could have simply acquired an accessory maker (cases, batteries, stands, etc) as a platform (with brand equity) for a series of emeded solutions.

      As it is, he has a one-trick pony that is going to be rapidly obsoleted by RFID developments.

      …and this is how people get 10mil in the valley.

      Jeesh! I have got a dozen ideas that are better than his, so where do I sign up for the “idiot” money?

      I guess that vc’s have a rule that says if u have one hit under your belt then u r entitled to fail upwards thereafter!?

      • Even if everything you’ve mentioned is true, it’s still a great device for me (freelance designer) to score clients I would not have been able to do in a cash-only transaction.

        The square its self was free, and took two days to get to my house once I signed up.