How Square's Model Could Take Over Mobile Payments

Payment newcomer Square has ambitious plans to build a universal payment utility that will allow merchants and customers to send payments to each other, accepting payments by swiping cards with a small square device the size and roughly the shape of a marshmallow in conjunction with a mobile device. "A lot of people have mobile devices and are looking for new ways to manage their money and their life," said CEO Jack Dorsey at the NACHA keynote speech this morning. "Square is one way to make that more approachable, to make banking feel good again. It makes a black box organization more human." Personally, Dorsey, who is also creator, cofounder and chairman of Twitter, mentioned he's attracted to banks that are doing innovative technology efforts. For instance, he used to have an account with a large bank, but when Washington Mutual came out with text messaging, he switched.Square aims to be hardware agnostic, with plans to accept check, card or online payments via mobile device or laptop. "We're building Square as a utility that won't ever go down," says Dorsey. "We're building service level agreements for customers and partners. Partners who are our processors are teaching us best practices and we're leveraging a lot of that to bolster our own security."

One interesting facet of Dorsey's approach to payments is a focuses on receipts. "We're interested in how to use the receipt as a publishing medium," Dorsey says. "Traditional receipts are a waste of a paper, I have to carry them around and then input them in an expense report. They could be a rich medium for massive transformation and evolution of an idea. Apple has taken some strides with emailing you a PDF that you can search and forward; it's useful. Why can't every merchant and payor have that same experience? We think there's a huge way to go to make that feel good. Then you have more engaged payors and sellers."

Square was the brainchild of Jim McKelvey, who was trying to sell glass artwork over the internet, but was unable to accept American Express. He felt the iPhone had all the technological features to be able to accept a payment, thus there should be an easy way to accept payment over his favorite mobile device.

Part of Square's competitive position is around being easy for consumers and merchants to use. Merchant terminals can require technician visits and also don't provide any information around the transactions merchants process, the Square executives say. A consumers could sell a couch on Craigslist and accept a payment for it. Even large retailers could do things like let a customer charge a purchase in the dressing room rather than waiting on line at a register.

Asked why banks and consumers should work with a startup rather than a company that has history in payments, Dorsey says, "We have to create something that's easier to use. The payment networks exist, we want to make them more comfortable for people to use."

Chargebacks and disputes will be handled the same way they are today, McKelvey asserts, but Square hopes to offer a layer of comfort by letting people pay people they know. "A lot of the fraud we're seeing in payments is around anonymous payments," he says. "Square's focus is face-to-face payments. Square enables the payor to ask for an immediate receipt in the form of a photo or a PDF." Square keeps track of users' phone numbers, email addresses and locations to identify and authenticate them. McKelvey also says Square offers levels of security and payors can opt into.

Square's business model is a work in progress, Dorsey admits. Currently the company is charging a normalized rate of 2.7% plus 15 cents per transaction, regardless of what type of card or payment mechanism is being used. "We're trying to make that cost as low as possible," Dorsey says. "We don't know if that's our end model, if that's the sustaining revenue."

Square already has an application that lets people accept payments over the iPad. It's focused on U.S. payments. Later it plans to test its service in England and other countries that already have far wider usage of mobile payments. Square might also try to work through ACH networks in the future, Dorsey says. "ACH for us is very fast and easy, if there's a product around it, we think we can upload that."