Mobile payments startup Square is now processing $5 billion in annualized transactions and reportedly raising $250 million at a possible $4 billion valuation. In other words, it’s off to a faster initial pace than PayPal recorded more than a decade earlier. But the San Francisco startup is getting some big-time competition from rivals such as PayPal and VeriFone, which are trying to slow down Square’s momentum and ultimately cut off its growth in the small- and medium-sized business markets.
Square’s prospects aren’t likely to dim overnight, but the new challenges brought by PayPal Here and VeriFone’s SAIL platform show how competitors are trying to target Square and where the upstart may be vulnerable.
What rivals are doing
PayPal Here is trying to bring some scale to small businesses. It’s touting the fact that is has more than 100 million PayPal users, many of whom will be ready to use PayPal’s mobile app to pay local businesses. And it’s playing up merchants’ ability to rely on PayPal for both in-store and online payments, taking advantage of the idea that mobile is breaking down the walls between the channels. PayPal is also relying on its suite of other products such as its WHERE ad network, recently renamed PayPal Media Network, to deliver offers to users. And it’s betting all the data it collects across PayPal, eBay, WHERE and its other properties can ultimately result in more-personalized recommendations and offers and better analytics for merchants.
Meanwhile VeriFone just announced a new mobile payments platform for small- and medium-sized businesses called SAIL that will also go head-to-head with Square. One of the key aspects of SAIL is that it works as an open platform, so merchants can integrate their own payments or marketing systems and businesses can employ third-party loyalty, marketing and social media tools. Rather than attempting to get merchants to adopt one system, VeriFone is betting they want a more open approach.
Both are also trying to undercut Square’s fee structure. PayPal Here offers a flat 2.7 percent transaction fee, compared with Square’s 2.75 percent fee. And for businesses that keep their money in a PayPal account, something most probably don’t want to do, PayPal offers 1 percent off debit card transactions from that account. VeriFone is also offering a 2.7 percent transaction fee but is including a $9.95 monthly subscription plan that brings down the transaction fee to 1.95 percent as an alternative for high-volume customers.
Square has grown quickly and now counts more than 1 million users accepting payments. But the service is built in some ways like a handcrafted product that works best for smaller businesses and individuals for now. The challenge is for Square to move up market and start to pick off bigger businesses that do more transactions and can bring in more revenue. The problem is Square is still working on how to grow beyond its streamlined payments strategy and how to build in the tools that can make it more appealing to a wider audience of merchants, such as businesses with multiple locations. Square has introduced an iPad register product that handles inventory data and analytics. But the company still has to decide how to build other offerings such as marketing, local offers and more robust loyalty services.
PayPal, meanwhile, has already bought assets it can bring to bear, tools like RedLaser and Bill Me Later, and it can conceivably connect to its X.commerce platform of business tools. Intuit, another competitor, is also challenging Square by creating tighter links between its GoPayment mobile product and its business software such as QuickBooks. VeriFone, as mentioned above, is opening its platform to third parties so merchants can plug in what they need. They are all trying to outflank Square, by either outbuilding or outbuying it on one end or being more open on the other.
Square, however, hasn’t shown any real interest in opening itself up as a platform. COO Keith Rabois spoke at GigaOM’s Mobilize Conference in September and said the company’s pursuit of making transactions as simple as possible means it’s not interested at the moment in opening up a Square API. That could eventually cut into the company’s growth if competitors are able to meet more needs with broader offerings.
Staying ahead of the competition
For Square, the challenge is that PayPal, VeriFone or any number of larger competitors can come in and try to disrupt its moves up market. Square’s elegant design and services like its next-day deposit of cash are very appealing, especially for small merchants and individual sellers. But as you move up to tier 3 and tier 4 retailers, many will want more than what Square currently offers. That could be bigger inventory tracking, bar code scanning of products, accounting software or more-robust marketing tools and the ability to hook into more hardware and software. That’s an increasingly important point: Even as we introduce mobile payments systems, it’s not enough to make transactions more seamless. Increasingly, it’s the added services that make a difference for merchants, helping them convince users to keep coming back.
Another issue for Square is that as it moves people to Pay with Square, its cloud-based mobile payments system, it needs to get more retailers on board. The whole value of a payments system is having a lot of merchants and retailers that consumers use regularly. Right now that’s a challenge for Square. PayPal is poised to compete for small businesses, but its digital wallet will ultimately work across large retailers, restaurants and other businesses, both offline and online. That makes the wallet more valuable to users, and it gives PayPal even more data to work with. Square, on the other hand, is still learning about its users through smaller purchases, which might not paint a full picture of those users.
Also, PayPal, VeriFone and others are emphasizing customer support in their offerings. PayPal Here offers live phone and online support, and VeriFone also has live phone operators for SAIL. With Square, it’s harder to reach a live customer-support employee, and most complaints get routed through email. This is another area where the big boys are trying to raise the cost of doing business on Square by getting the company to invest more in customer service.
How can Square respond?
Square is still set for big growth, because there are a lot of businesses and individuals that are adopting mobile payments tools. And more than its rivals, it’s known for having great design and a simple user experience, which is one of the reasons Square has stood out. The company is hiring like crazy and could conceivably build out many of the tools it needs in-house. Or it could take its newfound valuation and funding and start picking off other startups. The company will need to do a combination of both.
Square could also open up to more third-party services. Square announced in November it was integrating with Star Micronics receipt printer and the APG Cash Drawer Vasario Series, so businesses could hook up some hardware to handle cash and print out receipts. It’s still not offering open access to developers, but I expect Square will have to open up more to keep pace with rivals. That could undermine some of the artisanal feel of Square and its signature design, but it could set it up to compete better as it moves up market. It could also think about teaming with regional banks or credit unions to offer a package of small-business services.
And ultimately, Square will also have to think about lowering its transaction fees. It eliminated per-transaction fees more than a year ago, but now it faces deep-pocketed competitors who may be willing to shave away profits to gain more market share.
I wouldn’t bet against Square, though. It has a great team, including founder Jack Dorsey and COO Keith Rabois, a PayPal veteran. But more and more, it has a target on its back as companies begrudgingly acknowledge its success. This is where Square will really start proving it’s a contender. It’s made a huge splash with its early success, but now it has to show it can stay ahead of its bigger rivals.