I don't get what Square understands that merchant account providers do not. There are tons of merchant account providers whose best interest is to give you an account, yet they still make you jump through all kinds of hoops to get one because fraud is so costly to them. (Chargebacks are expensive).
If it was profitable to make it easy to get a merchant account it seems that this market is developed enough that it would have figured it out by now.
Square makes it sound like they are effectively "merchant accounts for everyone" Makes me wonder what they have figured out on the fraud prevention side that nobody else has.
I don't get what Square understands that merchant account providers do not.
They're willing to take a different approach to risk management. AFAIK merchant account providers only deal with really-low-risk customers - established businesses - and they don't have to invest in fraud detection/mangement because they just pass all the chargebacks along to the merchants. Square will be accepting significant risk; when they get a chargeback they can try to take back the money from the recipient via ACH, but in many cases it'll already be gone and Square will have to eat it. We can expect Square to evolve the same hypersensitivity to fraud as PayPal, freezing accounts (aka stealing people's money) at the slightest provocation.
At a guess, they're trying to make it up in volume.
If you're a merchant bank, the smallest thing you can profitably target is a small business, so even a handful of significant bad accounts will do bad things to your bottom line.
Assuming that the potential customers of this service are not trying to commit fraud, and that each one of those customers is doing a relatively low amount of transactions, Square could put this device in the hands of enough people that the aggregate chargeback percentage would still be low enough to be profitable.
One possibility from the video (n.b. I had it muted): Requiring a photograph of the buyer, as well as their signature, might help quite a bit with fraud prevention...
Unfortunately, there is a reason why getting a merchant account is a pain in the ass. The bank doesn't want the risk (for good reason).
The thing about Square isn't the device... it's the service. So when things go poorly, they will be the ones that have to foot the bill. If they open things up too widely, then they will be exposing themselves to huge risk.
From the video on the square site it seemed like person to person transactions are encouraged. I'm guessing turn around time for money transfers are going to be longer and maybe a secondary online approval process for some transactions for non-merchant accounts.
I really like the idea behind Square, but are customers really going to trust a dongle hanging out the end of someone's phone? Whats to stop someone reverse engineering the dongle and creating a spoofed client that just records the data instead of performing a charge?
I could see this being a great tool for electricians, plumbers, and other in home service persons.
There is already a high degree of trust there, and certainly anyone who understands what reverse engineering a dongle entails also understands why the alternatives are equally vulnerable to fraud.
That's already a risk every time your card leaves your sight. The details on the strip aren't much more than what's on the front of the card. I know I had access to people's cards back when I worked retail. The store-copy of receipts had full card number, name, and expiration date. This device is the least of your security worries when it comes to a credit card.
Not sure how long ago you worked in retail (hopefully a long time ago) but that practice is now illegal under US Federal law. This isn't to refute your point since credit cards carry little risk, a lot less than carrying around cash anyway.
A valid concern, but a dishonest merchant can easily enough skim your credit card already. Ever since the proliferation of camera phones, it's not been hard for a bad employee to instantly and stealthily copy your card's information.
To step back a bit: I love how elegantly Square has adapted the market's current de facto e-payment option, but I have to wonder if that's really the way forward. If Square is really in it for the long haul, they'll probably do a Netflix: build a solid business on applying good UX to the current technology, then use that leverage to pioneer in the next paradigm.
> Ever since the proliferation of camera phones, it's not been hard for a bad employee to instantly and stealthily copy your card's information.
Not only that, I remember hearing years ago about a scam where a cashier had a PDA and was swiping the cards twice that came through the register, once in the register and once in a card reader attached to the PDA.
You bring up a really good point. There is definitely a perception gap square needs to overcome before a device like that is trusted by consumers on a wide scale. When someone buys something from a mall kiosk, the mini credit card machine is probably perceived as more secure and trustworthy than a square device on a iPhone.
Theres no doubt that the concept and execution of square is ahead of the curve, but there certainly exists an array of intangibles that may prevent it from gaining critical mass.
A while ago 20/20 or Dateline did a special on a wearable ankle reader. Waiters would pretend to drop the card and on the way back from picking it up would covertly scan it on their ankle. This technique plus ATM skimmers mean this type of thing happens already. If you monitor your credit card and report the number stolen or compromised soon enough you shift most of the liability away from yourself.
So then when I pay for my meal at dinner and the suspicious waiter pulls out their iPhone to swipe a $5 transaction I might never notice? Not that I'm especially bad at watching transactions, but I am sure that this could be a problem.
Edit: Not that I don't like this idea as a business invention, because it really does ease taking payments for service-based companies.
Interesting perspective from American Banker. If anything, Square is shaking up the established market and getting established industry veterans working on true mobile payment.
> Beth Robertson, the director of payments research for Javelin Strategy and Research of Pleasanton, Calif., said that if Square is able to allow merchants and consumers to accept card payments without a conventional merchant account, that may be a bigger selling point for the system than the technology itself.
allow merchants and consumers to accept card payments without a conventional merchant account
Isn't that called PayPal? Square is PayPal, but on the iPhone; it doesn't seem hard to understand. And it's surprising that PayPal themselves missed this opportunity, given that they started on the Palm.
My understanding is that PayPal originally was intended to be that and now is the most sophisticated fraud detection and combatment system ever created.
> Just as Napster allowed people to directly share music online, PayPal enables people to exchange money instantly without having to open expensive merchant accounts to accept credit cards. Yet to Levchin's surprise, advanced cryptography has had little to do with PayPal's success. Rather, the company's rapid adoption by millions of small businesses and individuals operating chiefly on Internet auction site eBay is largely credited to Levchin's more recent obsession: developing financial surveillance software that closely monitors PayPal's customers and almost instantly alerts both the company and law enforcement officials to any suspicious account activity. "We mine millions and millions of transactions in real time," Levchin says.
> now is the most sophisticated fraud detection and combatment system ever created.
That's not saying much about fraud detection systems then. Seems like every other day there is some story about someone whose PayPal account was frozen without any chance for appeal or even a solid stated reason as to why it was frozen.
A little bit of selection bias there: you don't read about all the valid transactions that go through, and all the fraudulent transations that get frozen.
Traditional credit card processors are able to settle accounts daily. It remains to be seen if Square will offer a similar service. Many established merchants (especially restaurants) desire what is called "real-time billing" or getting cash in the bank once the card is swiped rather than waiting for payment to be deposited or settled.
The other problem is that Square accepts anyone. The reason its difficult to get a merchant account through other payment processors is because chargebacks ARE EXPENSIVE.
(payment processors will not accept a merchant that is above a 2% chargeback rate). This means that Square will be susceptible to a larger amount of chargebacks (which means that most of their angel funding will likely be in an escrow account to protect against chargebacks).
Great idea but we'll see how these issues are handled.
How is the reader powered? Their copy on the home page (as well as in the video) says:
"Read payment cards from any device with an audio input jack, including your mobile phone."
From the image on their page, the reader is using a 4-pole 3.5 mm plug, which might mean it's powered from the host device. If not, I guess it needs a coin cell which would have to be replacable unless the entire reader is disposable.
I searched for a pin-out of the headphone jack, and it seems the 4th pole is for the microphone which (of course!) is used to send the credit card data. Is their app playing some sound, thus allowing the reader to power itself from the audio outputs?
Isn't this just Paypal? But instead of giving someone my email address to transfer funds, they have to get their dingle-whatsit out and I have to get my card out and mess around?
I am interested in seeing how paypal will move into the mobile space. I think they have a great opportunity as more and more people use multi-media mobile handsets.
A while ago I bought gas and forgot my wallet. I had to call someone to come and pay for me.
If only I could have gone to a website on my phone and paid by paypal. Or phoned someone and asked them to go to a website and pay for me, and the cashier give me the receipt as it happens.
Guess that's as much down to the garage as paypal though, eh?
It would be cool if the attendant was there and he/she had a paypal merchant account to accept a payment there on the spot where you can log into your phone and send a 20 dollar payment (or whatever the amount) and the attendant will start up the gas machine for you. Paypal could make it so fluid that everyone will be compelled to sign up for at least the mobile app, even if not everyone uses it all the time. Just like everyone really should have a sign on for Skype, even though they might not use it on a daily basis
Exactly. 2.9% is very high for card-present transactions where the risk of fraud is lower and 1.9% is more normal. The extra 1% will cover a lot of fraud/chargebacks.
Visa and Mastercard charge merchant account providers a set percentage (called interchange) and then the providers mark up from there. Interchange is different for every industry because of varying fraud and chargeback rates. Also consider the risk of card present versus card not present (or ecommerce). So I guess this is a long way of saying it depends. For card present situations like Square will always be, you can get an account under 2% if you are in a low risk industry and hammer your sales agent.
If it was profitable to make it easy to get a merchant account it seems that this market is developed enough that it would have figured it out by now.
Square makes it sound like they are effectively "merchant accounts for everyone" Makes me wonder what they have figured out on the fraud prevention side that nobody else has.