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Who’s Afraid of NFC? Not Square

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Square, the San Francisco-based personal financial services company co-founded by Twitter co-creator Jack Dorsey, has a simple mission: to become an iconic financial brand, much like Virgin is for airline travel and Apple is for mobile computing. The grand ambition of the company is reflected in its brand-new office in the former San Francisco Chronicle building — it is massive but still sparsely populated. There are the usual trappings of a startup: well-stocked kitchen, espresso machine, iMacs and even some Dells.

The company also has one more thing — Keith Rabois, formerly of PayPal and Slide, who is essentially the Charge d’affaires of the company, though his official title is chief operating officer. Rabois, who is also a well-known angel investor, recently gave me an update on the company, which despite its legal problems, has been growing at a rapid clip.

Square makes a tiny little card reader that plugs into the headphone socket of an iPhone, Android Phone or an iPad. The Square app resides on the mobile device and, using the cellular radio, communicates with Square servers, which in turn route the transactions. The idea behind Square is that anyone can accept credit card payments anywhere — a simple enough idea but incredibly difficult to execute.

I first wrote about the company over a year ago, and outlined why I thought it was going to be a disruptive start-up. Since then I have followed the company and its competitors closely. The company recently got a $27.5 million fresh capital infusion from Sequoia Capital and according to The Wall Street Journal, is valued at over $240 million.  Why such optimism around Square?

Shucking Oysters, Taking Credit Cards

During the first three months Square was available, the company signed up over 100,000 accounts. Since then, the pace has accelerated. In January 2011, the company added about 65,000 accounts. February 2011 looks even better — they are on track to add another 75,000. The company is helping process between $2 million to $10 million in transactions every week.

For Rabois, the trick is to keep up the momentum without spending precious dollars on marketing. Of course, he has other reasons to be stingy. “Most of our competitors (including the likes of VeriFone and Intuit) focused on 7 million merchants who have the ability to get merchant accounts from say Visa or MasterCard,” says Rabois. Many have good enough credit to be approved for taking credit cards. “We are going after 26 million folks who are not merchants in a classic sense.” Nearly 60 percent of these wouldn’t qualify for the more traditional merchant payment solutions, Rabois said.

From farmers hawking their wares at a local market or folks shucking oysters on the beach, Rabois believes that is the gold mine Square has to tap into in order to build a sustainable long-term business. The company cannot, however spend a lot of money trying to acquire these customers, or else it finds itself in a fiscally unsustainable position.

Squaring Off with Credit Card Fraud

Rabois is also helping the company deal with fraud, by building fraud-prevention systems that take various inputs (including social media data) to prevent scams from happening. In near real-time, it has to figure out if the merchant’s identity is real or is a scam.

Taking the lessons he learned at PayPal, Rabois is helping Square use a combination of algorithm and human-checked processes to overcome the problems. “So far we have done well, but it is easy to make mistakes,” Rabois noted. This worries him enough to spend a lot of company resources on hiring experts, including statisticians.

While fraud is a current and ongoing challenge, the company has looming threats. Many industry heavyweights are vying for the opportunities provided by the shift to anywhere personal mobile computing, and several new technologies are gaining attention.

NFC? No Problem!

Most of the attention focuses on NFC (Near Field Communications), which is being built into forthcoming version of mobile devices and will obviate the need for solutions such as Square. Rabois dismisses all such talk and argues that the consumers as such are still going to have to carry debit cards, driver licenses and other such cards, which means the wallet as we know it isn’t going to go away. As long as there are cards with magnetic strips, readers such as Square and the back-end services that support them are going to be in demand.

“NFC is a promising technology,” he said. “We are waiting for folks to come up with compelling NFC apps.” Rabois points out that Android doesn’t have any credit card linked to the device just yet. (Apple’s iOS has an edge over Google in that aspect.) “And if NFC does become popular, we can bake it into our product as well.”

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15 Responses to “Who’s Afraid of NFC? Not Square”

  1. Square will be well-positioned to take advantage of NFC when necessary. There’s a lot more to payment processing than transferring a number from a payer to a merchant.

  2. Hey Om! The San Francisco Chronicle is still in the San Francisco Chronicle building!! We have some groundbreaking technology: Gather news and then print it in on dead trees.

  3. Funtomas

    NFC is not about payment only as the “C” stands for communication. Yet, it can petty easily establish a P2P connection. So I suspect Google had it in mind when adding support for NFC into android. Got it? Yeah, you can share files with your friends, circumventing carriers. So now, you’ve got clear idea who’s to afraid of NFC, right?

  4. Lyle Thomas

    NFC and mWallets are the future of payment (there’s a reason the heavyweights are already heavily invested), and their direct competitors are well ahead of them.

    Even if they eschew NFC, there’s nothing new here. Square processes their payments through a card processor (Chase in their case) or ACH, and requires a credit/identity check like every other provider. There’s a reason they want your SSN. Read the fine print.

  5. “We are waiting for folks to come up with compelling NFC apps.” – easy enough to do already. A simple database apps is required to access the NFC chip and store the meta data. Hook that meta data into the browser via a simple plugin and all of a sudden your browser is NFC capable and can send that data to any web service. No attachment required.

  6. NFC is just the physical medium for conducting a transaction, it only replaces the physical credit card. Individuals and small businesses won’t find it any easier to receive a payment thru a bank using NFC, unless Google or Apple offers that service. If Square establishes itself as a popular electronic payment processor, there shouldn’t be any reason why they couldn’t support NFC payments.

    I am hoping that Square offers consumers the opportunity to use one of their adapters on their own phone (or even computer), so they can swipe their credit/debit card when making an internet purchase, without having to enter any numbers (this would also reduce the fee for merchants to 2.5%, which is lower than for transactions where the card is not physically present).

    I really love the idea of Square, I wish they would have let me invest. I think this will be a bigger hit for Dorsey than twitter.

  7. I don’t see anything in this post that explains why Square is not afraid of NFC, other than the dismissal of NFC as an emerging technology and one that won’t displace credit cards for some time.

    The issue with this is that Square itself is an emerging service, and if it is emerging in a space that runs counter to an emerging technology like NFC (which will likely have strong momentum), then the clock is already running out for Square.

    I think they understand this, though, and simply don’t want to tip their hand too much while they’re in the kitchen “baking” NFC into the Square model.