Square's mistake

If the mobile payment competition has not been strong before, with Apple entering the market this week with Apple Pay it became brutal. The company that got hit the hardest might be Square.

The pioneer in sending money via an extension on your smartphone and later via mail revealed a weak spot: Their goal (and value proposition) was to make payment as easy as possible, while still relying on credit cards. However, getting this card out of your pocket was far less of a hassle than dealing with the apps by Square and its copy-cats. Over time Square seems to have sensed that as they spread their offering from POS-cash-machines to food ordering and – with its acquisition of Caviar for presumably $90M in August 2014 – food delivery (another crowded space). Its high valuation prevented them from going public, and also made further investment rounds difficult (however, in October 2014 Square announced closing a Series E investment round, $150 M at a $8 Billion valuation). It is a complicated situation they find themselves in now.

Square’s biggest problem: Their business model is of a low-profit kind, as they have built their system on top of credit card institutes such as MasterCard and Visa. These two giants are able to demand hefty fees, while others take care that their anachronistic system keeps up with the pace of technological progress. This means little work for high returns which results in a profit margin of around astonishing 40 %. Square surely helping here.

Another problem is that merchants who use their cash machine can easily swap it with one that offers lower fees. All of them are built on credit cards, so nothing stops them from doing that. PayPal, Amazon and others are very willing to compete on price, and Square does not offer enough to move the game to another playing field.

If I would be in the position to suggest a strategy, I would recommend Square to go after the Point Of Sale Business. This is what they are already good at. Offer a great cash register that speaks NFC, provides controlling, accounting and analytic tools and more (there are a lot of other ideas to come up with that empower small shop owners). Leave the payment side to those who dare (for now).  ((Doing this means to acknowledge that some investments have to be written off.))

In short: Square (so far) failed to built a platform that locks in either the customers or the sellers. That is why Apple Pay might hit them so hard. Apple itself sees that business from a completely different point of view. They don’t plan to make money with that offering. Apple’s platform and cash cow is the iPhone, and with Apple Pay they have just one goal: Increase the lock in for iPhone customers even more.