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Technologists are obsessed with it. Banks have invested in it. And unlike most mobile payments products, customers are actually using it.
Square, creator of the white smartphone trinket invented by Twitter co-founder Jack Dorsey, may yet see its early success co-opted by bigger competitors, and may never live up to its reported $3.25 billion valuation. But in a few short years, as big banks and financial companies have struggled to innovate in the increasingly fractured payments industry, Square has demonstrably changed it.
Small businesses that never before accepted credit cards, from popcorn stands and coffee shops to PTA boards and taxi drivers, are now swiping customers' cards through Square devices—and quietly helping the banking industry's long war against cash in the process. An August deal with Starbucks will aggressively expand Square's power and presence, giving its digital wallet a national foothold in one of the only stores where customers regularly pay with their phones instead of their credit cards.
For these reasons, American Banker has named Dorsey the Innovator of the Year for 2012.
"What they've done has opened up a whole new class of merchants for the payments system. It's just brilliant," says James Tierney, chief investment officer of money-manager W.P. Stewart, which owns shares of MasterCard and other technology-minded companies. "What they've brought to the industry is fantastic."
Some banks are trying to challenge Square at its own game. Bank of America this fall came out with a similar mobile card reader for its small-business customers. But other established payments companies, including Citigroup and Visa, have welcomed Square and even invested in it.
Deborah Hopkins, Citi's chief innovation officer, gave Square a fervent testimonial in June, telling an industry audience she was "obsessed" with Dorsey and what he has accomplished in Square's three years on the market. Such enthusiasm for an outsider is unusual these days in the banking industry, which is increasingly trying to defend its turf from encroachment on all sides. Non-financial companies from Google to Wal-Mart are dabbling in mobile payment systems, trying to wedge their way into the next big thing—if not cut out banks altogether.
None of these efforts, from banks or their competitors, have so far managed to make a difference. Customers still largely swipe their credit cards instead of tapping their smartphones to buy things. But thanks to Square, now they are swiping their cards at more places. The device's plug-and-play design and its fixed, transparent pricing have won over merchants who previously didn't want to bother with traditional credit card readers or who objected to paying expensive and opaquely-set swipe fees.
"We're proud to have created a product that can benefit individuals, small businesses and the largest organizations in the world," Dorsey said in a statement describing himself as "honored and humbled" by American Banker's recognition.
"We look forward to continuing to make commerce easy for the benefit of buyers and sellers everywhere."
Key to the sense of ease Square provides is its upfront pricing.
"Flat pricing is important," says consultant David True, a former MasterCard executive. "When I get Visa and MasterCard [fee schedules], I have no idea what it costs me" to accept cards.
He says Square "was brilliant in that they identified a very underserved segment of the market, the small and medium sized merchant." But "a lot of people have followed them."
Likewise, Tierney warns that Square will have to defend itself against "fast followers," and there already are several companies offering rival technology, including Groupon and VeriFone.
But consultant Eric Grover of Intrepid Ventures says Square's mobile wallet and Starbucks partnership should help it stay ahead of rivals—and potentially help it siphon off some bank business.
"I don't think they're trying to make money providing card acceptance [with the Square device]. It's a little bit of a Trojan horse to push their mobile wallet—that's a lot more risk, a lot more disruptive, and potentially justifies some of the valuation," Grover says. "It gives them a beachhead with consumers. That's something that if I'm a retail bank, I'm watching."
