Square: Payment Made Easy

You don’t have to start from scratch to do something interesting, Jack Dorsey

First Commerical Video of Square in 2015

The founders of Square, Jack Dorsey and Jim McKelvey had met each other in a much earlier time than 2009 when Square was founded. In 1992, when Jack was 15, he worked at Jim’s software company as Jim called him “Jack the Genius” as he demonstrates strong programming capability and possesses a unique entrepreneurial vision.

McKelvey has a serial of start-up experience, totaling seven start-ups from CD cabinet maker to a glass-blowing studio, including Square. In the beginning, he invited Jack Dorsey to co-found Square when he had trouble selling a $2,000 art piece from his studio. In the meanwhile, Jack Dorsey was voted out by Twitter’s board of directors led by Evan William stating Dorsey was unfit to lead the 3-year old company. Then, within a summer, they developed a direction towards peer-to-peer payment platform, then the origination of Square was established, was named Squirrel in the very beginning.

We believe everyone should
be able to participate and
thrive in the economy. Square’s Vision Statemnet

Square initially focuses on solving the small business dilemma “Whether or not to accept credit card/purchase a card-reading machine.” The founders realized smartphones have precisely what is needed to process a payment, computer chip, network connection, and touchpads; however, it is missing a card reader. Thus, Square’s debut product is a card reader that acts as an extension through the iPhone. Revenue is generated like most payment terminals by 2.75% of the payment volume. However, the utility is irreplaceable because it makes payment accessible everywhere anytime.

The earliest adopter is Starbucks, Starbucks invested $25 million in Square, and Square became its exclusive processor of debit and credit card payments for all 7,000-plus stores in the United States. It was a successful move for Square to create exposure to market; however, this partnership has cost Square a $71 million losses, the vast majority of Square’s transaction costs come from fees paid to Visa, MasterCard, and other credit card companies.

Source: Amazon.ca

Afterward, Dorsey and McKelvey have continued to develop hardware products like Square Stand, Square Terminal, Contactless Reader, etc., to supplement different levels of payment collection further. On the other hand, Square also sells POS services to businesses that include payroll service management, employee portals, sales management, customer service application, etc. As the services start rolling-out, it was exceptionally successful for small business owners to manage storefront operation, payroll management, and finances in one setting.

In 2012, Square launched Square Capital, which is dedicated to solving small business cash flow problems, utilizing its data library extracted from business payment transaction data, Square Capital sends loans to businesses disregarding its credit score, ranging from 8% to 14% interest payment with a fixed base fee. Square Capital Head, Jacqueline Reses, enabled Square Capital to scale and mitigate its capital risk by selling securities to third-parties. However, the growth was not filed separately with Square’s other services.

In 2014, Square acquired Caviar, a 2-year-old food delivery company, to capture the growing food-delivering market. Square provided additional value proposition to Caviar by leveraging their relationship with small enterprises and developed new tools such as inventory tracking, Offline Mode, and Square Order to complete with larger food-delivery competitors. Due to food-delivery competitive nature, Dorsey declared he wanted to focus on core areas of growth and sold the Caviar for $410 million to Doordash.

Most importantly, in 2013, Square launched the Cash App, a revolutionized P2P service, completing against Venmo (owned by Paypal) and Strip. The Cash App provides instant payment service, banking features, investment brokerage service. With a distinct marketing strategy and a brand focus on technology, the Cash App has become the leader of the P2P payment industry. It yet continues to explore the unbanked population opportunities.

It’s really complex to make something simple
Jack Dorsey, 2011

Strategy 1: Hardware & Software Synergies

Ever since the very beginning, the Square Reader was not the profit driver. Square Reader was the product to get Square “Foot-in-the-door’, which unveil new sales opportunities with its intertwined software add-ons. High customer acquisition cost (CPC) is one of the hardest parts of the SaaS companies model. First, it is because 99% of the time, there are companies that offer the same services at a similar cost. Second, the SaaS companies and customer relationships are mostly transactional, and it is rarely seen customers are willing to pay an additional fee for related services.

Square’s go-to-market strategy leveraged the hardware technology in smartphones and introduced an extension tool to collect a payment, directly substitute credit payment machines. Adopting its software has vertically integrated within its data structure, generated a synergetic effect. The Square Reader is directly connected to its software, which made data more accessible and more comfortable to monitor financial performance.

To summarize, Square’s hardware product interacts together with its POS software services in a synergistic way, such that the value of the ecosystem is greater than the sum of its constituent products.

Strategy 2: Shopify-like Ecosystem

By combining an elegant integrated payments system with a distinctive conversation-triggering piece of hardware, Square has disrupted the credit card payments establishment while making credit card processing more accessible to small businesses everywhere. In addition to its popularity in mainstream media, Square has built a competitive moat against its competitors.

The idea of the Shopify ecosystem circulates under one business factor, convenience. In a simpler term, Shopify’s all-in-one platform aggregates all the operations work together in a business-friendly way. With Shopify, it is super easy to start an online business with its built-in features, including payment processors, website builders, marketing campaigns, and affiliated social media advertisement campaigns. The same idea with Square, small enterprise owners do not have to worry about its payment logistics, as Square provides a wide range of services.

Such that the value of the ecosystem is greater than the sum of its constituent products, something like 1+1 = 3. In Square, its software services and hardware products supplement each other, and the small business owner chooses Square

Initially, the multi instantaneous development strategy is heavily criticized by the public market as Square’s exposure to so many sectors will diversify their attention and resources to focus on growth areas. From 2016 to 2020, their customer acquisition for its payment software de-accelerated year over year, however, churn rates have remained significantly low.

Source: Seeking Alpha

Strategy 3: Sales & Marketing

Square’s Cash App is directly completing with Vimeo, who shares an identical business model, but Cash App rolled out to the mainstream market about three years later than Venmo. However, the Cash App focuses on three areas

  1. Focus on customer acquisitions in the unbanked population geographic
  2. Target students/younger demographic
  3. Try different promotion strategies (against financial institutions)
Source: ARK Management

Dorsey targeted the geographic with a high FDIC rate, given Nigeria’s success in the mobile payment market. It is proven that unbanked populations are seeking an alternative way to manage finances instead of going through a financial institution. It eases payment distribution without sacrificing any features provided by a bank.

Square also targets tech-savvy younger demographics by sponsoring podcasts like Artificial Intelligence with Lex Fridman, the Joe Rogan Experience, and even e-sports teams.

Its promotion strategy is particularly interesting as well, instead of formulating what banks do, which are completing registration incentives and rewards and host local events. Cash App focuses on growing its social media presence with a promotion campaign #CashAppFriday, which is as simplistic as giving cash away every week, varying from $100 to $500.

Source: ARK Investment Management

Catalyst — Agility Over Everything

During the pandemic, Square’s agility allowed them to better weather the epidemic over major financial institutions. Its strong balance sheet (3.2 billion net working capital), diversified income streams, strong customer engagement, have given Square agility to combat with any turmoils.

One of the benefits of operating a start-up is that the company is the structurally founded yet, which enabled them to take risks and have longer visions. In the midst of chaos and change, Square introduces direct deposit features applicable to stimulus payments, extends Square Capital loans, and increases #CashAppFriday giveaway prize pools to capitalize on the opportunity.

Jack Dorsey’s Future Goal

Jack Dorsey, is the CEO of Twitter and Square, has been recently challenged by Elliot Management onto his capability to manage two companies at once. As Square grows, Jack Dorsey faces two questions: Is he able to handle two companies sustainably? If not, what is my new role if I leave the company?

just articles about technology strategy