Last week, Starbucks made the announcement that they have decided to invest in the San Francisco payments company Square, and will soon allow customers in their US stores to pay with Square’s mobile payment application “Pay with Square.” This was a great vote of confidence for Square, but a somewhat surprising move for Starbucks.
Square is a really interesting company. It was founded by Jack Dorsey (of Twitter fame) in order to help small merchants accept payment cards. Square removed the friction for small merchants by doing three things: they radically simplified the merchant sign-up process; they offered consistent, transparent, and reasonably affordable pricing; and they enabled just about anyone with a smartphone to accept cards by creating a little magstripe reader and application that communicates with their servers over the phone’s data connection.
I first became aware of Square at my local farmers’ market; the guy who sells handmade pasta pulled out his iPhone, swiped my card through a little square-shaped device plugged into the headphone jack, and handed me the phone to sign my name. Since it was a farmers’ market, the merchant had no phone line or power source, but he didn’t need either; the card was read by Square’s app on his phone, which then communicated to Square’s servers over the mobile phone network. As I walked off with my purchase, I received a receipt for the charge via email. It was unbelievably cool. It felt like the future of cashless payments.
Since then, I have run across several other mobile phone-based payment systems that work in similar ways, but Square has continued to expand their offerings into a set of coordinated products. They now offer a point of sale (POS) app for the iPad, which is probably more than adequate for a small merchant, and a related “Pay with Square” application for consumers. Pay with Square is like a digital wallet, in that consumers can register their credit or debit card account, along with a picture and name, and then make charges against their card at any Square merchant.
Instead of using Near Field Communication (NFC) like Google Wallet, Square relies on the GPS functionality built into most smartphones. When a Pay with Square consumer enters a Square merchant, the consumer app knows this by virtue of its current GPS coordinates. The consumer is then asked if he or she would like to “open a tab” with the merchant, and if so, the consumer app notifies the merchant’s terminal via Square’s servers. The merchant can then tap the customer’s picture and name to initiate a new transaction. Square likes to point out that using a picture and name makes the transaction more “personal,” but the real advantage, at least for the time being, is that the consumer doesn’t need an NFC-enabled phone (only about 1% of phones sold today are NFC-enabled). Pretty much any smartphone with a GPS will do.
Pay with Square also seems to skip the signature step, which raises some interesting questions. When you sign a traditional transaction slip, you are legally authorizing the merchant to charge your account. The card networks have relaxed this requirement for transactions under certain amounts at certain high-volume/low-risk merchants, but it is unclear to me if Pay with Square transactions are also subject to these same rules, or if they have negotiated a general suspension of the signature requirement with the card networks. If the latter, this introduces a sticky issue with regards to fraud and transaction disputes. If you dispute a transaction, the merchant is required to produce a copy of the signed receipt, but if there is no signed receipt, Square will have to provide some kind of evidence that you, and not someone who stole your phone, authorized the transaction. The merchant can verify your picture and name, but what stops the thief from updating the picture before making fraudulent purchases? Perhaps Square uses picture analysis algorithms to detect significant changes to the registered picture, triggering a review?
By capturing both the consumer and the merchant, Square is also able to do some interesting things related to loyalty programs. Merchants can establish various schemes, such as every 10th coffee is free, and Square does all the work of tracking the purchase history and notifying the consumer and merchant when various goals have been met. Think of all those little punch cards you carry around in your wallet today, and how those could just become automatic and seamless in the future.
I would suspect that Square, being founded by the former CEO of Twitter, is also thinking about tapping into the social networks of their customers, though I haven’t seen any announcements related to that yet. For example, Square could easily send you offers to your favorite merchants and let you forward those to friends on your various social networks. Or they could notice that you and some of your friends often frequent the same restaurant or bar, and extend an offer to your entire group.
Of course, the real chore facing Square right now is expanding their merchant and consumer network, which is why the Starbuck’s announcement is so important to them. More than anything, Square needs visibility, and soon every customer who walks into a Starbuck’s store will see their name and hear about their products.
The Starbuck’s announcement also helps to legitimize the very idea of mobile payments, and will most likely help to increase adoption of schemes like Square. Historically, consumers have always had troubles developing trust in new payment systems, and are typically unwilling to use something that seems “experimental” or “cutting-edge” when it comes to their money. But one of the ways in which consumers establish trust more easily is if some business or organization they already trust introduces them to the new system. Think of when you meet a new person via a trusted friend; if you trust your friend and your friend trusts the new person, its becomes much easier for you to trust that new person as well. It works the same way with organizations and systems; if you trust the organization, and the organization vouches for the system, you tend to feel less apprehensive about giving it a try.
One thing is certain though: it will take quite a while for mobile payment systems like Square to displace cash and plastic cards. In fact, the use of cash in the United States and the UK seems to have increased during the recent recession, and the use of credit and debit cards continues to increase as well. The idea of using your mobile phone instead of a pastic card is still a bit too “exotic” for most people over 30, and it will likely take a generation before it becomes commonplace and normalized.