Money is a problem. And not just how to acquire it--but also how to accept it, spend it, analyze it, save it, and transact with it.
The idea that a business owner might lose a sale simply because the exchange of currency between buyer and seller is inconvenient or impossible--well, that's an absurd problem to have.
And yet that's precisely the problem Square co-founder Jim McKelvey confronted one day several years ago when trying to make a sale. You see, in his spare time, McKelvey--a serial tech entrepreneur known for founding Mira Digital Publishing--blows glass, and occasionally he sells his pieces.
That day, he was set to make the sale of a $2,500 sink faucet, but he didn't have a way to accept the customer's credit card. He lost the sale--but he gained an idea. What if there was a way for a business owner--really anyone, for that matter--to accept a credit card on his or her phone but without all the hassle?
Coincidentally, McKelvey was talking to Jack Dorsey later that day on his iPhone. The two had worked together at Mira when Dorsey was 15 years old, and they had stayed friends.
"I'm talking to Jack on my iPhone, and I look at my iPhone and I think, Here is everything that I needed to save that sale," he told St. Louis Magazine in 2011. "So I said, 'What we ought to do is build a payment system to prevent little businesses from getting screwed the way they've been getting screwed, because it's really tough if you're a small-business man to accept payment cards."
Dorsey had left Twitter in 2008 a newly minted multimillionaire, but he was eager for new projects. Specifically, he was interested in doing something on mobile devices--and he liked this idea. Over the next few days, McKelvey and Dorsey began strategizing about how to build a mobile payment company.
By 2010, once the company had gained some traction, McKelvey stepped back to let Dorsey, the CEO, drive the growth of the company.
"I said I'd do whatever was necessary to get Square to the point where they could hire people that were better than me," McKelvey recalls.
Dorsey's career trajectory has been anything but traditional. He's written dispatcher-software code for taxi companies (some of which is still used by cab companies); he's studied to be a masseur; and later, of course, he became well known in the Silicon Valley circuit for co-launching Twitter with Evan Williams and Biz Stone, whom he met while working at Odeo.
"I like building utilities," Dorsey said recently at a talk at Stanford University.
He's good at it, too. Just as Twitter was useful for a variety of purposes (from sharing your breakfast habits to breaking down regimes in the Middle East), Square can be leveraged for simple monetary transactions (like paying your friend for movie tickets) as well as complex transactions (according to a company representative, a surprisingly high number of doctors, lawyers, and other service professionals use Square as their main form of payment).
By streamlining payments for both consumers and merchants, Square has found particular adoption among small-business owners--a point of pride for Dorsey.
"We think [Square] has a social impact," Dorsey explained to St. Louis Magazine. "From the merchant perspective, it's giving everyone access to the tools that we use. Everyone has a payment card in their pocket, but very few people can accept that. With Square, everyone can participate in commerce, and it's taking a lot of the financial risk off the table. I think that's a big deal."
A company spokesperson says the start-up has processed nearly $10 billion worth of transactions (on an annualized basis) among some 200,000 merchants and three million users. The customer loyalty is remarkable. Square takes a 2.75% transaction fee, but it ends up paying more than half that fee to credit card companies. Still, business is booming: In 2011, there were 150 employees. By 2013, the company projects to have about 1,000. In just three years, the company has raised a total of $200 million, with its most recent valuation at $3.25 billion.
The company is aggressively pursuing partnerships with major retailers to solidify its place in the world of payments. Last year, Starbucks and Square partnered up, with Starbucks injecting $25 million of its own capital into the company. With Square Wallet, Starbucks customers can purchase their cappuccino simply by holding their phone up to a small receptor.
"We have seen a tremendous response from our customers, with more than 100 million mobile transactions occurring in our U.S. stores since its launch," Adam Brotman, Starbucks's chief digital officer, recently said in a statement.
But perhaps what's most impressive about Square is the company's desire to disrupt an industry many people don't even think of as an industry, per se. Square recognizes that our transactional relationship to money--to cash and credit cards, specifically--is completely outdated, especially for merchants.
Many small-time entrepreneurs, for instance, can't afford the fees imposed by credit cards. Square charges its merchants a straightforward 2.75% fee to swipe any major credit card--with no additional merchant account fees. This is in direct contrast to most credit card companies, which usually charge businesses a flat rate of anywhere from 8 cents to 15 cents per transaction. For businesses that have a high number of transactions--with a relatively low average transaction cost--Square can make a big difference to their bottom line.
Take a coffee shop, for instance. If a cup of coffee costs $1, a 2.75% transaction fee barely eats into the coffee's margin. But a 15 cent transaction fee is essentially a 15% fee on that cup of coffee--a pretty huge cost for a simple transaction. Multiplied out over hundreds of cups of coffee every day, it's easy to understand why coffee shops would dislike accepting credit cards: It's just not worth it.
But it is also changing the way sales happen, taking the Apple retail experience as a cue.
Dorsey is also known to be something of a retail pundit, if not a retail philosopher. Square, he says, brings "the point of purchase to the decision." With Square, he says, there's no more waiting in lines or dealing with unnecessary paper, which, in turn, brings people closer to the products and services they desire.
"The more you can minimize the thinking around the mechanics in the moment, then more people are going to use it," Dorsey says. "In Square's case, it gets you to the value of what you're actually intending to purchase, and getting the mechanics of the purchase out of the way."