Square Gets Buzz, Gives Few Details

SEATTLE — Square Inc. has finally shared some of the details about its mobile card acceptance system, but payments executives still feel as if they haven't heard the whole story.

The San Francisco company has generated plenty of buzz since proclaiming late last year that it would "revolutionize" the payments industry with a device that lets small merchants and even consumers use mobile phones to accept cards.

To date, that buzz has not been matched with a compelling explanation of how its mobile acceptance device is significantly different from other emerging products aimed at small merchants, or why consumers would even want to use it. Square's two top executives did little to answer those questions here during a keynote panel at the Nacha Payments 2010 conference.

"Their idea has merit, but a lot of the details need to be thought through," Steve Ellis, a senior vice president with Wells Fargo & Co. and one of the panelists, said after the event. "They didn't answer a lot of the questions."

Instead, Jack Dorsey, Square's chief executive, offered a high-level perspective on why the current payments system is ripe for innovation.

"Payments is inherently social, it's a form of communication, but it's never been designed in a human way," he said during the session.

That sentiment makes sense, given Dorsey's background in social media websites — he co-founded Twitter Inc. and was its chairman. And just as Twitter has helped foster a sense of online community, he wants Square to make payments a more pleasant interaction for both customer and merchant.

"It's very cumbersome and complex to get into accepting payments. … It's not as approachable as it could be," Dorsey said. "We want people to love it."

Dorsey and Square's chairman, Jim McKelvey, did divulge some details about the company's business.

Square is already offering an app for Apple Inc.'s recently released iPad, though it can only be used now as a point of sale system to manage cash transactions. By the end of this week, a version of the app that handles card payments will be available for both the iPad and the iPhone, and Square's card processing system is expected to be up and running.

Merchants will be able to download the app and insert the eponymous Square card reader into a phone's audio jack. They do not need to set up individual merchant accounts with an acquirer, but they do need to set up accounts with Square, which already has relationships with multiple acquirers and will act as the merchant of record.

Square has set pricing, but is still working out much of its own business plan.

Users will pay 2.75% of the purchase, plus 15 cents, for each payment, which are treated as card-present transactions. Dorsey emphasized that there are no other fees, no setup costs, no hardware expenses, "because that is the best user experience. No matter what card the payer pays with, a Square user is always paying the same amount."

As merchant of record, Square is liable for transaction risk and must cover the interchange fees, which will vary widely depending on many factors, and could exceed those rates.

"Sometimes we win, sometimes we lose," McKelvey said in an interview.

Dorsey said his goal is to make Square's fees as low as possible, though he acknowledged that pricing remains a work in progress.

"We don't know if that's our end model. We don't know if that's a sustaining revenue that will … push the company to the next level," he said. "It might be something we have to edit down, but it's something that feels simple, and it feels good."

They are aiming at both small merchants that often do not take cards now, and individuals, who might want to accept cards if they are selling used goods, through CraigsList, for example, or for informal transactions such as paying a baby-sitter.

Some observers questioned whether consumers would want to accept cards for person-to-person payments.

Neal Platt, a senior vice president with CashEdge Inc. and the money transfer technology provider's general manager for banking, said consumers may be reluctant to carry around a Square reader and pay a transaction fee to accept money from friends or acquaintances. "They bring a Web 2.0 usability focus, and they want to make payments easy to use, but they didn't do a great job of talking about how this would work."

Ellis at Wells Fargo had some concerns about security, as well.

McKelvey said during the keynote speech that users' identities could be verified by a number of factors, including their e-mail addresses, phone numbers and physical location, using the location-aware capabilities built into many phones.

But Ellis said this boils down to verifying people using data that could be found on the Internet. "Their model puts Square on the hook for risk. That's a big deal," he said.