Hip to be Square

Six years ago, when Jack Dorsey announced his second company, Square, we sat down and talked not about the product but the moral imperative behind the company. “We went through the whole payments process and worked on designing a brand-new (person-to-person) payment system,” he said.

In several subsequent conversations, private and public, that discussion continued to unfold. Dorsey often talked about helping those merchants that were too small and often ignored by the large payment processors. The audacity and ambition of the company was pretty clear at the time.

I saw Square work out its bugs at Sightglass. I saw it at work in the farmer’s market outside the Ferry Building. I saw the card reader peeking out from the lilybelle flower seller’s cart. A lot of my friends had started to work at Square and it was clear that this was not a card-reader company. I didn’t think I

Square_Net Revenue

be using the reader to send money to another person, but I totally believed that lowly reader could become a godsend for individual merchants, those who practice every day commerce – taxi drivers, taco trucks and coffee vendors.

At the time I wrote:

I think that this is truly disruptive. The reason Square exists is because of three macro trends: the pervasiveness of the mobile Internet, the increase in the use of electronic payment systems and most importantly, the availability of low-cost, always-on computers (aka smartphones) that allow sophisticated software to conduct complex tasks on the go.

The marriage of computing and connectivity without the shackles of being tethered to a location is one of the biggest disruptive forces of modern times. It is (and will continue) to redefine business models, for decades. Square is simply riding these waves.

Dorsey’s vision of building an ecosystem for the individual merchants resonated with me at a visceral level.

I remember getting into a conversation about money, transactions and our commercial relationships, which prompted Jack to delve into why Square was obsessed with its receipts and how they were attempting to humanize what was essentially an after thought. I remembered that conversation, when I came across this bit in company’s S-1 filing:

In 2014, we sent 147 million digital receipts; for the six months ended June 30, 2015, we sent approximately 105 million digital receipts, representing nearly 70% growth over the same period last year. We currently see more than 1.5 million monthly feedback communications sent by buyers to sellers through digital receipts.

Over the years I argued that Square was less of a point of sales gadget company and more of AWS-equivalent for the small business services. During the process, Square has learned that chasing consumers through apps is a futile strategy, when in the end their customer is the atomic unit of commerce – individual merchant and their customer.

These days I spend most of my time looking at the dreams of others, hoping to find that clarity of mission and desire for a profound, societal change in people who choose to spend time with me. I have not talked to Dorsey in months, but I use Square Cash to manage my tiny art project and its finances. And every day I am reminded of the reason for Square.

Today, when Square publicly unveiled its financial information ahead of an impending public offering, it was good to see validation for what I have known anecdotally — a healthy company growing a nice clip despite missteps and increased competition, intense scrutiny and innunedo around its viability. It was also great to see yet another founder laying down the reasons why Square exists, why it matters and who it aims to serve.

Square_Net Revenue

Here are some things which stood out for me from Square’s S-1 filing:

  • Square generate approximately 95% of its revenue from payments and point-of-sale (POS) services.
  • In 2014, sellers using Square processed $23.8 billion of GPV, which was generated by 446 million card payments from approximately 144 million payment cards. This excludes card payments processed for Starbucks and Square Cash peer-to-peer service.
  • In the 12 months ended June 2015, over two million sellers accepted five or more payments using Square, accounting for approximately 97% of their GPV.
  • Square Capital has advanced over $225 million since launching it in May 2014.
  • In 2014, Square sent 147 million digital receipts; for the six months ended June 30, 2015, that number was approximately 105 million digital receipts. Square says digital receipts result in over 1.5 million monthly feedback communications sent by buyers to sellers through digital receipts.
  • Jack, over past two years has given over 15 million shares, or 20% of his own equity back to both Square and the Start Small Foundation, a new organization he created to meaningfully invest in the folks who inspire Square: artists, musicians, and local businesses, with a special focus on underserved communities around the world. He has committed to give 40 million more of my shares, an additional 10% of the company, to invest in this cause. “I’d rather have a smaller part of something big than a bigger part of something small,” Dorsey noted in his letter to potential shareholders. He owns 24.6 percent of the company.
  • Square despite being labeled as a card reader company, is a much smaller hardware company. Square Reader for magnetic stripe cards is distributed for free and the company thinks of it as” sales and marketing expenses.” Square Readers for EMV chip cards and NFC will be sold. and will be reflected in hardware revenue and hardware costs, though company is selling them at cost. It would not surprise me to see them follow the original Reader model when costs become more manageable. Original card reader used to cost about $10 a reader.
  • Square’s risk managment approach starts not with data science but with that very human of emotions – trust. “Our risk management approach starts with trusting sellers. We remove the friction of signing up, then use technology to quickly detect and eliminate risky and fraudulent activity,” they write. As a result the company has developed a risk model that allows it to accept approximately 95% of sellers who seek to process payments with Square, while keeping risk and fraud losses low. Risk and fraud losses accounted for approximately 0.1% of GPV in the 12 months ended June 30, 2015. Since inception, Square has have ceased providing services to fewer than 5% of sellers. [On the flip side, there are many merchants who have been unintentionally victimized and others who complain about the lack of real support. More here.]

About two years ago I wrote a piece about design is not just pretty websites but instead it is about the entire experience. Square was among the examples I cited. I looked over the S-1, read through the whole thing and it was good to see that even as it become a billion dollar revenue company, the soon to be public SQ hasn’t forgotten that vital lesson. That doesn’t mean, there isn’t room to improve, but it is sure good to see them make progress.

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