Jack Dorsey’s Square and The Future of Payments Industry

Jack Dorsey Drawing Dinis Guarda

Jack Dorsey Drawing Dinis Guarda

Square closes $200 million funding round that will value the company at $3.25 billion.

Since launching in late 2010, Square, the payment platform used to facilitate credit card payments with iPhone, Android or iPad, has created a big buzz around its brand, funding, media, business sales and engagement. Part of its success resides in its founder, the man with the Midas touch Jack Dorsey.

The innovative co-founder of Twitter is increasingly becoming the new maverick of Silicon Valley, somehow positioning himself in a profile that will surpass Steve Jobs if we take into consideration that he is just 37. Dorsey was one of the main architects behind Twitter, and his vision and scope for Square in the broader credit card and payment industry is bold and clear. In a June 2012 interview for Wired magazine, he explained some ideas that show that he knows what he’s doing:

“We’re adding more information to every transaction, so everyone can have more confidence and lower the risk of fraud or nonpayment. So fees could come down as card companies take on less risk. Lower merchants’ costs means they can charge customers less. When will Square have broken through? We look at volume going through the system, active users, sign-ups, risk. Some combination of those implies concrete success. I’m not sure what that combination is now, but, you know, we’re only two years old.”

This week Square is on the verge of closing a $200 million funding round. This is a very impressive number, and values the dongle devise and app-based mobile card reader “startup” at an amazing $3.25 billion, according to the New York Times .

In a time when the financial industry is collapsing and most of the news coming from  the banking and finance world are negative, the news of this valuation is a rare beam of sunlight. Square is a financial payments innovative venture with quite a lot of challenges ahead for sure, but has been raising solid money and focusing on the important aspects: customers, product development and focus. And the new round of funding to Square for users will definitely enable them to expand its infrastructure and product capacities and global growth.

This new $200 million round of funding will be led by Suhail Rizvi from private equity firm Rizvi Traverse Management, which has previously invested in Square chief Jack Dorsey’s global social network venture company, Twitter, says the Times, citing sources. This firm has a solid portfolio of companies that include ICM, Facebook, Key Air and Keystone Aviation, Summit Entertainment, and has partnered with Hugh M. Hefner to acquire Playboy Enterprises, Inc.

The new amount of funding suggests that Square has got serious attention from investors and has doubled its value. Square raised $100 million in a round valuing it at around $1.6 billion a year ago and the firm had been playing aggressive in its goals and valuation, seeking investment at the $4 billion mark, says the Times.

Two million users for Square innovative dongle and app system

Square has seen huge growth and presently claims around two million users for its innovative dongle and app system. The Square innovative tool and services enables and facilitates merchants to accept card payments using smartphones in an easy and fast way. The startup has been working hard to position itself outside of the US where at the moment it has most of its business volume. As has been predicted it will process an astonishing $6 billion in payments this year.

Its revolutionary product is a square-shaped credit card reader device that plugs into smartphone earbud jacks and works in sync with mobile apps both for the iPhone, iPad and Android devices. Square helps individuals and small vendors, merchants like taxi drivers and nail salons accept credit card payments on their mobile phones without having to go through banks or other financial players. Square provides the reader and the software free, and its business model is based on a charge of 2.75 percent of the transaction to its users. Of that fee, it collects a small amount and sends the rest to credit card companies.

Adoption of Square has been fast and quite amazing, taking into consideration that the financial or payment industry is not particular innovative or fast in its tech adoption. In the first six months of 2012, Square has roughly doubled the number of users to two million. At its current pace, it is going in the direction of processing $6 billion in transactions per year.

Since introducing the device’s hardware, Jack Dorsey and his team have expanded the company’s offerings and products to include Square Register, an application that turns an iPad into a credit card register for small businesses, and Pay With Square, an app for customers to use. All of these products are easy to use but are profoundly radical innovative products.

The Challenges for Square and the Future of the Payment Industry

Money is changing and becoming digital, it is also adapting towards social media signs and is influenced by users needs. This trend creates a fast moving landscape for finance, international payments and currencies’ borders with money flowing from country to country, people travelling more and more. And curiously it happens in a time when this ecosystem of change finds the financial industry eroding and losing the trust of the general population, startups and SMEs that somehow are the real drivers of the economy.

Square is an interesting player in this landscape of a financial and banking industry. Being sponsored and mentored by the best in Silicon Valley, Square has data monitoring and a social media top level DNA genesis, and seems to have its focus on what is critical, such as the trust of its customers, product development and being profoundly innovative and open to change. This in itself is everything the financial industry has been lacking in the past.

However independent of its fast and frequently debated success, the challenges for Square are huge. The company that still calls itself a startup faces increasing competition, with established and well capitalised major global players such as the Ebay giant powered PayPal, Intuit and Verifone, all offering similar products. Moreover, other big Silicon Valley players are big rivals and are disrupting the card business model, bidding to take cards out of the equation, through mobile wallets and contactless payments. This is the case of Google and the Isis consortium of telcos. Mastercard, American Express and Visa are also trying new digital payment solutions, so the task for Square will be a big one. Apple seems to have some thoughts on the subject as well with its ecosystem based on iTunes.

Square however is taking a sober and bullish approach to its prospects. Most of its success so far relies on its founder’s, Jack Dorsey, inventive pragmatism, energy, hard work and vision. Jack is a highly detail oriented investor, as well as a developer and tech geek with an exceptional capacity to deliver. Because of these traits,  investors are taking him seriously. Most of Dorsey’s achievements so far rely on simple ideas with huge impacts, he tries to put all of his efforts into the product development and especially into the attention to detail for customers. His work is excellent at solving issues for users, the businesses and merchants, startups and namely SMEs, that don’t want to continue giving big commissions to banks or financial players.

Square’s strengths rely on the above-mentioned features, and this is also where the established financial and payment industry is going wrong. Creating a close relationship with merchants is a critical achievement and potential to grow and leverage. In the US alone, eight million merchants accept credit cards, this number is huge if we consider the rest of the world. It goes to show there is a large amount of untapped demand, and if well nurtured this direct relation with merchant customers can create a solid business and open doors for the company. Therefore Square’s head of strategic planning and analysis Steve De Wald recently dismissed PayPal as a challenger and potential partner. Square is focusing its strategy on creating a relationship with merchants and cutting out the middle man. In the end it creates  control over the sale back to the merchant. Additionally, Square is using advanced analytics and wants to become more direct with the merchant and the social-networking data to verify what is and isn’t a legitimate business.

Responding to a question asking if PayPal has approached Square about an acquisition, Steve DeWald was quite honest in his vision and his view about the eBay unit:

“I don’t think we would ever consider working with PayPal in any capacity. Our cultures are too different and fundamentally incompatible. Square still has the mentality of a startup… PayPal is a part of the problem. They’re just another card processor that doesn’t care about their customers.”

The future of the payment industry will pass through the renewal of trust coming to users, merchants and customers. Moreover it will incorporate digital signs, mobile, apps, social network data measurement and serve the needs of customers and clients directly without the invisible middle men. Hopefully Square can reform and bring that necessary innovation and direct trust building to the different stakeholder groups.