Nov. 5 2010 – 12:50 pm |By BRUCE UPBIN
Photo credit: Dave Getzschman
Paper clips, ball point pens, the VW Beetle, USB thumb drives are all disruptive technologies because they’re small, cheap and easy to use. Add to that list the Square payment system, which makes exchanging money by credit card a smaller, easier, cheaper task. It’s one of our Names You Need To Know in 2011.
The Square is a one-inch gizmo that plugs into the headphone jack of an iPhone, iPad or Android phone. It has a thin slot through which you can swipe a credit card. The gizmo and the app it works with are free. Transaction fees are on the high side but roughly in line with the industry. Sellers pay 2.75% (plus 15 cents) of the purchase for a swipe transaction, and 3.5% (plus 15 cents) when the card number is keyed in. But there is no monthly charge, equipment fees and activation fees.
This is a game changer for all the little shops, independent contractors and merchants who live in the physical realm, where an estimated 93% of all commerce still takes place. Small boutiques, piano tuners, SAT tutors, golf instructors, bake sale moms (dads), personal trainers, and even politicians are starting to use Square. Don’t be surprised By making its product easy to use, Square is supporting a lot more people’s itch to start little businesses or sell their wares and expertise. Such people are often put off by the cost and hassle of bigger wireless card readers ($150 to $900) and can’t provide a sales history as part of a reference/credit check.
Square was started by Twitter cofounder Jack Dorsey, who runs it with chief operating officer Keith Rabois, a veteran of PayPal and social media bluechips Yelp and LinkedIn. These two believe in the power of social media so much that they decided Square should use social media as the way to fight fraud. When merchants apply for credit, Square looks at their social footprint: Facebook fans, friends and wall activity, Twitter followers and retweets, blog activity, Yelp reviews and photos on Flickr and Google StreetView. “Getting 100 Twitter followers is not a trivial exercise,” says Rabois, “You must exist to do that.” Square tested its method this summer on 50,000 merchants. Its chargeback rate was below 5 basis points (that’s good; anything below 1% spares the merchant from fees). Square regressed instances of fraud among its users against traditional credit checks and found the old-school method to be no more accurate in predicting fraud among its users. Rabois asserts that more than 30% of the applicants approved by Square would have been denied a traditional merchant account.
Users are raving but there are bugs to work out. Apple users grouse about the AT&T network. Transactions sometimes lock up. The iPad app won’t let you enter in custom amounts (but you can create an item and give it any price you want). John Horning, a physician who does house calls in San Francisco , likes Square’s ease and simplicity but would like to get paid faster. Square set him up at first to receive only $1,000 a week, with the rest at the end of the month. He was upped to $3,000 a week within 45 days, but his old system, a Verifone Nurit 8000 wireless card reader linked to a First Data account over the Sprint network, paid the entire balance within 2-4 business days. Maria Murnane, a former PR pro and now a fiction writer, sells her books and related tchotchkes using Square and a Motorola Droid. She gets her money right away and says accepting credit cards is a lot easier than juggling checks and she’s been able to sell more books to people who don’t have enough cash on hand. One raving Square fan: Brandon Arnovick, owner of Mission Minis in San Francisco. He sells 1,000 to 2,000 minicupcakes for $1 each. Customers check themselves out at his counter with a Square and an iPad. He ran down to Square’s headquarters a few blocks away and got them to give him some of the earliest swipers. “They’re going to totally blow up,” says Arnovick, meaning that in a good way. “If people aren’t scared of technology, this company will totally blow up.”