By Patti Murphy
The Takoma Group
I've glimpsed the future of micropayment acceptance in America, and I can't help but wonder: could it be square - or rather Square? By now, you probably have heard about Square Inc., the latest brainchild of Jack Dorsey, co-founder of Twitter.
I had a chance to speak with Dorsey after a demonstration of the Square payment device at the Fifth Annual Underbanked Financial Services Forum. (The June 2010 forum was presented by the Center for Financial Services Innovation and American Banker.)
I'm not convinced yet that Square is an idea whose time has come. And I don't expect Square will turn the payments space upside down. But I am intrigued by Square's potential to move micropayments to plastic.
Think of Square as PayPal for the Twitter set. The intent, Dorsey said, is to make it possible for "anyone to immediately accept" credit and debit card payments. For now, though, it can only be used domestically.
The card-acceptance technology is contained in a small, square box (not much bigger than a wall-phone jack) that plugs into a mobile phone's headphone jack and incorporates a swipe reader. Square hands out the devices for free.
The company's income comes from transaction fees: 2.75 percent plus 15 cents, regardless of card type; more for card-not-present transactions. "We're network agnostic," Dorsey said.
For now, Square is available only as an application for Apple Inc. iPhones and devices running on Google Inc.'s Android operating system. Dorsey expects it will eventually work with all new generations of mobile phones. Dorsey described Square as a transaction "aggregator," a role the card brands traditionally have looked upon with disfavor, but not any more, apparently.
"Visa and MasterCard love us," he said. Square has agreements with several card acquirers; processing workload is divvied up by geography, he added.
Dressed in jeans and a sweater, a rather large tattoo peeking out from pushed-up sleeves, Dorsey didn't look the part of keynote speaker at a banking conference. He seemed to fit the bill of a Millennial, however, those 20- to 30-somethings who came of age with the Internet.
And these folks are designing payment systems of the future. They grew up demanding instantaneous gratification, and they have few, if any, preconceived notions about the way things should be - like the idea that banks run payment systems. "Payment is inherently a social thing," Dorsey said.
Dorsey, who was designing software for taxicab dispatchers at the age of 14, describes himself as "dedicated to creating public goods which foster approachability, immediacy and transparency." Twitter was just the start; Dorsey has an army of investment "angels" backing him.
"These are not technologies people are creating, but entire social networks," Dorsey said of Twitter and Square during his presentation at the CFSI forum. "Everything is completely designed by the users."
David S. Evans, an economist, university professor and founder of Market Platform Dynamics, a Boston-based consulting firm, refers to apps like Square as "payments innovation on steroids." He pointed out that social media platforms and evolving mobile technologies support super-quick product rollouts.
Square began distributing the software app and card reader this May. To see Square in action, check out the short promotional video on the company's website, www.squareup.com.
Here's a quick overview: Users sign up for a Square account online, or via mobile device, after they've downloaded the Square app to the device; the Square card-swipe plug-in arrives by mail a few days or weeks later.
To accept payments with Square, the user launches the app and plugs in the card swipe, enters the transaction amount and swipes the payer's credit or debit card. (Card-readers aren't required; transactions can be keyed in, at a cost of 3.5 percent plus 15 cents.)
The person paying can sign for items right on the phone screen. Electronic receipts, with maps showing the exact location of where the payment took place, can be sent to purchasers by text or email.
Dorsey believes the potential applications for Square are enormous. By most estimates, there are in the United States today about 6 million merchants who take in less than $100,000 a year in credit and debit card payments.
Dorsey sees these folks as prime candidates, especially since Square assumes all the merchant risk, including Payment Card Industry Data Security Standard compliance risks.
Then there are the countless situations in which individuals need to "square up" with one another financially and don't want to hassle with cash or checks. Situations like friends divvying up a dinner tab, selling items on craigs- list and garage sales.
Square isn't the first person-to-person (P2P) micropayment scheme to use mobile telephones; PayPal Inc. is after this space, as are a few lesser known firms.
Addressing a recent payment conference at the Federal Reserve Bank of Chicago, Evans explained how a convergence of technology and network innovations - from cloud computing to apps stores - along with the ubiquity of the web and mobile telephones, is changing the payments landscape. "Software platforms will drive innovation and transform the payments industry," he said.
That's what seems to be happening with Square.
The micropayments market is huge, especially P2P payments. Just look at PayPal which reportedly handled $21 billion in payments in the first three months of this year alone.
Worldwide, the potential for micropayments exceeds $1 trillion a year, according to the international consult-ancy Arthur D. Little.
Recent surveys by various organizations indicate that upwards of half of all Americans would be interested in using mobile phones to make payments. Square takes that process a step further, by making it possible for everyday people to accept payments via their mobiles, too.
It may not be a technology whose time has come, but Square is sure to gain converts, especially if it works as easily and painlessly as the developers claim.
Plenty of folks (me included) didn't expect PayPal to work, but it did, and it continues to work quite well. And now, a large and growing generation with expectations around immediacy is graduating into adulthood. Square responds to this need, just like Twitter and PayPal. And as with most things social, many of the rest of us won't be far behind on the adoption curve.
Patti Murphy is Senior Editor of The Green Sheet and President of The Takoma Group. Email her at patti@greensheet.com.
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