Why Square Has the Credit Card Industry on the Run

The Square dongle lets you accept credit card payments on your iPhone with the companion application.

VeriFone’s new “open letter” scare campaign proves that Square is going to for to the credit card industry what Apple has done for mobile computing — make cutting edge technology simple and accessible. Square allows iPhone owners to accept credit cards without monthly fees and contracts, and threatens the the entire credit card processing industry. I’m part of that threat as a small business owner and Square user, and apparently someone to be feared.

When I started my computer repair business eight years ago, I learned about the complex world of “merchant processing.” Unlike the simplicity of cash or checks, credit cards pass through a variety of gateways and processors that sit between the customer’s bank and the merchant’s bank, and carry a complex set of fees and procedures that limit a merchant’s ability to accept credit cards.

When I researched processing for my business, salespeople wouldn’t quote exact fees. They wanted to see my last statement first, but they always promised they’ll somehow save me money. They also required a credit check when applying. It felt like a used car salesperson looking at my bank statement before telling me how much the car costs. I had little choice but to just accept it as industry norm and sign the multi-year contract with a stiff early termination fee. Fees varied on each transaction depending on various unpredictable factors. This is why many businesses have minimums for transactions or give a cash discount.

This is still generally how the industry works. I even tried Intuit’s iPhone solution and found out that while I didn’t have a contract, my fees varied wildly from what was quoted and from what others were charged. Then I found Square, and I’ve been delighted every since. Simple statements and the exact same fee regardless of credit card type or issuer. No monthly fees either. I fell in love with my iPhone all over again, and customers loved how quickly and easily we as a business accepted credit cards.

Like VeriFone states, “anyone” can get a Square reader — as if this were a bad thing! VeriFone’s concern isn’t about protecting customers, but rather about protecting VeriFone’s business model. Square’s system is actually more secure since the GPS location of the transaction is captured by Square. VeriFone’s wild claim that providing free hardware somehow increases risk to consumers is incredulous. VeriFone believes that somehow consumers would be tricked by a rogue application using Square’s free reader as a skimmer? There’s already a skimmer built into the iPhone: the camera!

Verifone hasn’t explained how Square’s free reader is more dangerous than situations in which you hand your credit card to a complete stranger and they leave your view, such as in restaurants. In fact, if you believe VeriFone’s fear-mongering, I implore you to follow your server (whom probably didn’t have a credit check done on them) to the pay station at your favorite restaurant and demand that you personally inspect the credit card terminal and verify that in fact a skimmer is not attached, and rogue applications aren’t installed. Let us know in the comments how that works out for you.

In reality, VeriFone’s “open letter” is a de facto endorsement of the democratization of credit card processing being led by Square. It proves that with Square’s business model, the multilevel and multi-fee structure of the majority of current credit card transactions is the real thing that’s being threatened, not the security of the consumer.

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