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How Big Can Square Get?

Trending by Angela Diffly
square-_reader_for_chip_cards_on_register_blogBold Move

Square reportedly has two million merchant customers and serves 30 percent of independent businesses in the U.S., with payment processing services making up 95 percent of its revenues. Competition from virtually every corner of the payments and point-of-sale ring is heating up, from traditional credit card terminals and processors to new point-of-sale players, emerging digital wallets and a vast array of mobile payments. But Square is far from throwing in the towel. The company has recently made a bold move to partner with once-competitive point-of-sale software companies to increase market and mindshare inside the ultra-fragmented SMB merchant world.

Late last month, TouchBistro (Toronto-based restaurant POS) and Vend (New Zealand-based retail POS) announced integration with Square’s platform (SuiteRetail came on board in May). This gives popular startup point-of-sale software companies access to Square’s hardware, data analytics, payments infrastructure and financial service offerings, as Square looks to accelerate its revenues in payment volume, already up 42 percent year-over-year according to TechCrunch. (Restaurant POS Upserve also inked a deal with Square, but it was limited to Square Capital).

TouchBistro’s founder and CEO Alex Barrotti sees mutual benefits as a result of the integration. “For existing Square customers using its basic register but looking for a more comprehensive solution specifically geared for restaurants, they can migrate over to our system without switching to a different processor. We can also now offer Square as a payment processing option to our customers, and that maps to our commitment to integrate best-of-breed apps for improving efficiencies in restaurant operations.”

Bloomberg speculates the new partnerships are about much more than point-of-sale integration. They allow Square to leverage new retail relationships, offering high-margin loans through Square Capital. (According to Investopedia, in the second quarter of 2016 alone, Square extended around 34,000 business loans amounting to $189 million, and the value of Square’s loans increased 23 percent from the first quarter of 2016, and an impressive 123 percent year-over-year.) “TouchBistro is offered in 35 countries and Vend has 15,000 retailers, so a big reason why this is a good deal (for Square) is that Vend has larger retailers than what are traditionally on Square’s platform. So that means more payments transaction volume, more money for Square and potentially bigger loans,” Bloomberg reported. (Editor’s Note: TouchBistro issued a correction to the Bloomberg quote. It is the top-grossing iPad POS for restaurants in 37 countries, but is offered in many more countries world-wide.)


Swimming Upstream

“This really carries Square upstream into other categories of POS, through ISVs (software developers) like us who support mid-market and enterprise cloud solutions, like NetSuite and Salesforce,” commented Jeff Schneider, co-founder and director at SuiteRetail. “Square’s solution is modern and easily scalable from back to front, versus just the front-end they’ve achieved with mom and pop shops early on.”

Retailer LAX World offers lacrosse equipment, clothing and accessories through its ecommerce site and fifteen brick-and-mortar stores in several states. “We decided to use SuitePOS with Square at all of our locations and it’s been a refreshing change from the traditional merchant processing experience,” commented Frank Barbarino, the company’s CEO. “Square gave us a custom rate that was competitive and truly flat, and it only took minutes to set up the merchant account at each location. Everything is now cloud and turnkey – ERP, ecommerce, in-store and Square is more of the same for POS payments. The hardware is a big plus, too – super simple and elegant.”

“The nimbleness that mom and pops have enjoyed is now available to the larger retailers,” commented SuiteRetail’s Schneider. “It makes sense that it will gain steam and dominate the entrenched old school (payment processor) giants like First Data, TSYS, Global Payments, etc. We are seeing it happen, and there is no bias on our part. We actually get paid from several merchant processors on referrals, where we get nothing from Square. But our customers love the net-net solution and it’s starting to catch on here.”

Rough Waters

But not everyone is sold on Square’s ability to maximize its market share despite partnerships that extend its reach. Jordan Thaeler, president and co-founder at WhatsBusy asserts, “Square’s actions totally contradict its claims. Its ‘cohesive ecosystem’ is being torn apart as it finds difficulty competing in what was supposed to be core competency: POS and payments. Now Square is prostituting its disparate, non-core products in hopes that it can stymie its epic loss-making.”

Henry Helgeson, CEO and co-founder of payment processing technology company Cayan told us, “Square will never be the defacto register solution for merchants – it’s too fragmented. But these partnerships are a great opportunity for them to go upmarket. However, it does appear as though they’re giving up their core business to become more of a pure payment player.” He divulged that although Cayan may have a more complex fee structure than Square, its fees are better overall. “With Square, you’re paying a premium for a simple product and pricing scheme,” he said.


Many agree that Square may not be the best option as retailers outgrow their micro-merchant beginnings. Senior analyst with Aite Group Thad Peterson pointed out, “SMB is a cluttered space for payment companies, but Square has a highly leverageable brand from their micro-merchant experience. They should be able to capitalize on that, but there’s probably a threshold out there somewhere where companies of a certain size will opt for more mainline providers.”

“Moving into SMB is a real challenge for Square,” commented IHL Group analyst, founder and president Greg Buzek. “If they stick with the payments portion only and get really competitive on price, they can make inroads. The cost of providing hardware, software and moving their current POS functionality past the basic level is probably cost prohibitive. They literally will have to become a full-fledged POS company to do so,” he said.

Exactly the point Huffington Post writer Mary Buffett made, “For all of their internet charm and good looks, Square will continue to be an easy entry point for small micro-merchants who want to attract a plastic-ready audience. The technology of turning a smartphone into a POS terminal is beyond clever. However, Square’s desire to move to larger merchants will be met by a brutal reality. Once their profitable clients reach a certain level of annual volume, any economic advantage of working with Square evaporates because the larger players like Chase, Bank of America, and Worldpay can do the job of merchant processing far better and cheaper. That means there is little beyond translucent brand loyalty to keep Square’s larger merchants as clients.”

Buzek pointed out that point-of-sale systems tend to be made up of 80 percent core functionality and 20 percent unique functionality that may cater to a particular segment. “Micro-merchants can live with limited functionality, but retailers who have grown up a little bit cannot. Forming partnerships with point-of-sale companies is critical in order for Square to move up the POS ecosystem.”

Squaring It All Up

In an annual letter to shareholders back in April 2015, J.P. Morgan CEO Jamie Dimon warned, “Silicon Valley is coming” for the banking industry. He may have been right, but he may also be resting much easier these days. Chase took over Starbucks payment processing from Square (which included all non-mobile payments and POS terminal upgrades to chip-enabled solutions; First Data handles mobile transactions, which make up 20 percent of total sales). At the time it was signed in 2012, the Starbucks deal brought Square $309.8 million in sales, but ultimately lost the company about $71 million according to Square’s IPO filing a year ago. As Quartz reported, “While startups can be appealing for their agility and relentless focus on technology, many merchants still crave the brand name, trust and reliability associated with more traditional financial institutions.”

But traditional financial players are investing heavily in their own technology, and many of today’s payments players, large and small, are rooted in tech. Just last week, Square announced it has reduced the speed of its chip card reader (EMV processing) by 25 percent, from 5.7 seconds to 4.2 seconds (measured from when a card has been dipped to when payment is complete) – with plans to get times down further to around 3 seconds. (Square claims average chip speeds are anywhere from 8-13 seconds.) But Cayan was faster, both with its EMV speed reduction claim (under 4 seconds) and the speed at which the company announced it (early May). And just a couple of days ago, industry giant First Data announced that its compact POS solution, the Clover Mini, clocked EMV transactions under 3 seconds (2.93 to be precise).

Huffington Post writer Buffett concluded, “Until Square figures out how to keep their merchants happily anchored for the long term, I question the viability of Square as a stand-alone brand for the mid and long term and would not be surprised if they end up on the acquisition block to be gobbled up by somebody else.”

For now, Square’s the one gobbling up point-of-sale software companies. Only time will tell if its eyes are bigger than its stomach.