This article was taken from the July 2011 issue of Wired magazine. Be the first to read Wired’s articles in print before they’re posted online, and get your hands on loads of additional content by subscribing online.
Jack Dorsey specialises in simple ideas with huge impact. Twitter, which he cofounded in 2007, began as a way for users to broadcast status updates to friends. It now has 200 million members. His new firm had similarly modest aims: enable anyone to accept credit-card payments through a reader that plugs into iPads and smartphones. Square has signed up hundreds of thousands of merchants and processed $66 million (£40 million) in transactions in Q1 of 2011 alone. The startup is building its users a vast database of financial information by tracking each sale made through its readers.
In January, Square received $27.5 million from Sequoia Capital, Khosla Ven tures and others, which valued the firm at $240 million. Visa has also invested an undisclosed sum. Wired talks money with the new king of ker-ching.
The idea for Square came after an artist friend lost a $2,000 sale because he couldn’t process credit cards.
Some eight million merchants in the US accept credit cards. There is such untapped demand.
You’re also trying to change how we interact with money.
Absolutely. Money has been with us for 5,000 years and been nothing but a burden. For instance, you come to my coffee store and order a cappuccino. I hit the Cappuccino button on the register and see it’s $3.24. I take your credit card and type “$3.24” into the card terminal. I swipe your card and give you the receipt to sign [unlike in the UK, chip and PIN isn’t standard in the US]. Then I staple it to the receipt and return it with your card. You take the card and bin the receipts. At the end of the day I have no idea how many cappuccinos I sold because it’s really difficult to access that information.
You didn’t know anything about the world of transactions when you started. How did you get up to speed?
We Googled “accepting credit cards” and learned how the system works. Basically, when someone uses a credit card, the issuing bank — the one sponsoring the card — forwards the money to an account set up by the merchant to accept card payments. The issuing bank gets repaid when the customer pays his credit-card bill.
Sounds simple enough.
It’s not. We tried to get a merchant account and it was a disaster. We had to create a whole corporate structure. We’d sign up with one firm and they’d route us to a completely different organisation. It took four weeks. Meanwhile, we had to pay to get our account set up and enter into a one-year agreement. Then we found out there was a monthly fee. Then a PCI [Payment Card Industry] fee. And a gateway fee. Then there was the interchange.
It’s the amount you pay to accept credit cards — 1.79 to four percent of every transaction.
All those fees go to the creditcard companies?
Everyone takes a cut: the merchant bank, issuing bank, credit-card company. Then there’s the independent sales organisations that sell the credit-card terminals.
So there are a million parties and a million fees?
Yeah. We thought we could do it a lot better. We wanted to make it so anyone come go through that whole process in one download. You put in your name and address, we ship you a reader, and you’re done. For free. All you pay is 2.75 per cent per swipe. That usually covers the interchange and leaves a small amount for us.
Why can’t you do all this through PayPal?
Because not everyone has a PayPal account. People understand credit cards. But Square is payment-device agnostic. It doesn’t matter how you pay. Some of our users accept only cash. When someone orders a cappuccino, the customer hands over their cash, Square calculates the change and the merchant has a record of every purchase.
How do you get customers to trust Square merchants?
Every Square vendor is identity-checked. You download the application and put in your name and address. We ask you three background questions to confirm your identity. Every transaction goes to the bank that issues the card, and it’s watched by Visa or MasterCard or AmEx.
So if I give my credit card to someone with a Square reader, I won’t get dinged with a bunch of fake charges?
If you use a credit card, the bank issuing the card handles a lot of that risk. Our risk is when we can’t prove the card was there — like a phone order. The worry isn’t someone coming in and stealing $1 million, but a million people each taking $1.
How are you dealing with it?
We have a team who work on risk. If a merchant records an unusual number of charges, we’ll contact them. It’s like when I go to France and make a purchase. Without fail, I get a call from AmEx asking if I’m actually in France. You’re also using social-networking data to verify what is and isn’t a legitimate business. Yeah, if users want to accelerate our review process, they give us extra information that helps us further validate their identity: the name of their business so we can check on Yelp, Twitter or Facebook. Twitter became a mass-communications network. Do you see similar potential for Square? Companies use things such as Google Analytics to learn how peopleare interacting, what they’re driven to and why. People use that data to build their businesses. But offline merchants, who account for 94 percent of world commerce, have no way to capture that data. Square can tell merchants how many cappuccinos they sold that day — critical data most small businesses just don’t have.
What effect do you think Square can have on the broader credit-card system?
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.