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How Square Disrupted the $14 Billion Payment Industry (And How Other Merchant Tech Companies Can Fight Back)

You’ve probably already purchased something using Square.

Whether it was at the farmer’s market, a local boutique, or even at Starbucks—Square has made money from a purchase near and dear to your wallet. The company has become a ubiquitous tool for many small businesses and has shaken up the payment industry.

How have they accomplished this?

They created an all-in-one operating system for small business. In other words, they took many of the “jobs to be done” for small business merchants and gave them solutions. They started with a well-designed credit card reader and a point-of-sale (POS) device, known as the Square Stand. That alone solved a major challenge for merchants: processing customer credit cards.

Square quickly became the go-to solution for flat-rate payment processing on a pay-as-you-go basis.

Then they built more tools for merchants. POS Software. Accounting software integrations. Analytics.

Small businesses can run their entire back-office using the company’s software. Once a merchant is locked into the card reader and is working to build up her business, she’ll be reminded to dig into other related Square products for tasks such as invoicing, analytics, and payroll.

The way Square “won” is by creating a closed system of commerce that very effectively enticed new customers into its initial offering (the card reader) and then deftly upsold them on further purchases within the Square ecosystem. Once customers were pleased with the initial service (and already bought into the overall operating system) the value-added products Square could layer on just made sense.

Square’s most impressive innovation: They captured “both sides of the counter.”

With a product like Square Cash, a peer to peer payment app (like Venmo), users make direct payments to each other, giving Square a foothold in consumers’ phones. Using the same interface on both the consumer and merchant side of things, Square now has the ability to eliminate the credit card as an intermediary to serve as the main point of value exchange between consumers and merchants.

By creating a closed marketplace that included a holistic suite of products for small business owners and launching handy applications for consumers using the same interface, Square disrupted a once-stagnant industry and made itself a major player in the process.

At the same time, merchants have other payment processing choices out there. Square itself comes with a few key disadvantages that merchants and merchant service providers should be aware of.

Merchants Should Be Aware of Some Disadvantages with Square

It hasn’t been all roses for Square.

There’s still a ton of competition in a growing industry. Operating a proprietary system brings its own inherent risks (though Square did open its card reader to developers in 2018). Consumers are not flocking to Square’s consumer-facing products such as Square Wallet and Square Order, both of which Square ultimately shut down.

There’s also a lingering question about whether Square can feasibly take on all merchant verticals and build a product that appeals to everyone. That’s extremely hard.Beyond the broad issues facing Square, there are deeper technical issues that merchants and merchant service providers should take into account.

First, when it comes to risk policy, Square relies on undisclosed algorithmic risk factors that put automatic holds on transactions the company deems suspicious. This sometimes creates frustrating experiences for customers and merchants alike when trying to resolve unnecessary holds.

Relatedly, customer service hasn’t always been stellar at Square. The company leans heavily on providing customer support through email, a Twitter page, and a support blog. Merchants have reported long wait times (sometimes several days) before getting any response from Square regardless of their initial contact method for support.

Banks and financial services are also not entirely ready to cede all the ground on payment processing. Some are negotiating with digital platform owners (like Square) to add brand identifiers into the payments process in order to reassert their brand presence—including special sounds when a mobile payment is completed on a specific credit card as well as tools to help consumers manage recurring payments.

These internal and external challenges to Square’s business model will continue to challenge their market share in payments processing.

The Growing Competitive Landscape for Payment Processing

The Growing Competitive Landscape for Payment Processing

Square’s competitors aren’t just rolling over.

In fact, some view what new players like Square and PayPal are doing as somewhat helpful. American Express acknowledged that Square and PayPal have expanded American Express Card acceptance among small businesses that traditional companies like American Express would not have been able to reach.

That’s one way to look at the silver lining of this massive industry shakeup.

Wells Fargo went so far as to simplify how it charges merchants that accept credit and debit card transactions in response to pressure from Square and other competitors. These changes were specifically targeted for merchants that process less than $100,000 per year, also allowing them to apply online for payment processing capabilities with Wells Fargo.

Some competitors are even joining forces to develop strategic partnerships that provide consumers with unique commerce experiences. For example, PayPal joined forces with American Express to allow Amex cardholders to pay for purchases using Amex reward points at millions of PayPal merchants around the glove. This allows PayPal (which already controls roughly 73% of the payment market in the U.S.) to challenge Square’s point-of-sale payment niche.

PayPal also recently acquired iZettle, a merchant payments platform based in Sweden, as yet another efforts to challenge Square by building a broader global reach.

This expansion of international competition in merchant technology will certainly keep Square on its toes for the foreseeable future.

Trends That Merchants Need to Keep an Eye On

Trends That Merchants Need to Keep an Eye On

Beyond Square, the landscape for merchant payment technology is shifting.

As such, merchants that want to stay competitive will need to remain vigilant about trends in the industry.

AI & Voice

For example, some banks and financial services are beginning to test voice and AI-driven tools to make service more accessible for customers. Banks like Capital One and Citibank have developed tools to help Echo users handle basic banking tasks via voice by communicating with Alexa. Bank of America even created its own voice assistant called Erica to enhance mobile banking for its customers.

Better integrations

In the U.K., newcomer bank Monzo created an integration with If This Then That (ITTT) to allow customers to connect their bank accounts to tons of apps to enhance the banking experience. Other banks are following suit by developing integrations with iOS tools such as Siri Shortcuts.

New ways to leverage ATMs

As more and more bank branches shutter due to the rise of online and mobile banking, many banks are beginning to rethink how they leverage their ATM networks. Forward thinking banks such as Bank of America and Wells Fargo are beginning to update their ATMs so that customers can use Apple Pay and Google Pay. This will be particularly useful for customers that need access to cash but aren’t carrying their bank card with them.That’s one giant step towards a cashless society.

Payment as an experience

More and more, payments are being baked into the overall customer experience and seen as a critical digital experience factor that helps to determine future purchasing behavior. That’s why many companies like Kohl’s and Shack Shack have launched their own private-label digital wallets, in an effort to capture more conversions.

Omnichannel payments

Consumers are also pushing hard for omnichannel payments. They want the ability to make purchases on every channel they find themselves using any payment method that suits them. Who can blame them? Millennials are of course leading the charge in this area as the lines between entertainment and shopping continue to blur.

Open APIs

When it comes to banking, open APIs and collaboration are increasingly the name of the game. Banks are moving to stay competitive with new fintech payment competitors like Square and PayPal while giving consumers greater abilities’ to link their banking to complementary apps.

“Plaform-ification” of payments

Relatedly, many banks are beginning to view these fintech competitors more as collaborators as new platforms (think Amazon) arise. These platforms allow consumers and producers to interact and exchange value whereas in the past their interactions were much more siloed. Consumers are pushing for more collaboration between the tools they’re already using, hence the development of such platforms. Banks and merchants will need to keep pace with these rising platforms.

Mobile wallets on the rise

Lastly, the mobile wallet trend is still on the move in the United States (whereas in China it constitutes 40% of in-person spending). As younger generations become more comfortable with mobile wallet solutions and newer generations grow up with them, the opportunity in this area of payment tech is very large.

Learning from Past Success in Payment Tech to Win the Future

Square, as a company, was clear-eyed about seeing a niche in the payment technology industry and exploiting it. They built a sleek suite of products and nurtured a faithful customer base of small business owners to gain significant market share quickly. They did this by staying ahead of trends and developing their business model accordingly.Today’s merchants and merchant service providers can act as Square did to see these trends for what they are (opportunities) and build the next great suite of payment tech products that will win the market.

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