Yes, I Accept Cards!

When you think of card payments what typically comes to mind is Customer to Business (C2B) payments – for dinner at your favourite restaurant, at Point of Sale (POS) terminals at your nearest Mall or at that E-Commerce sites that you now buy everything from. However, Jack Dorsey, Twitter Co-founder, is all set to change this, through his new venture – Square.

Square is an application, that let’s individuals accept card payments through their iPhones/iPads or android-phones. It consists of a small square-shaped dongle and an app that virtually converts your phone or tablet into a POS terminal. All that needs to be done is to swipe the card through it, enter the amount and wait and watch as the money is transferred to your Bank account!

The best part of all this is, the dongle and the app are absolutely free!

Wait, free is it, then how do they make money?

Like in any card payment transaction, there are 3 major parties involved  – the payer’s bank (issuer bank), the payee’s bank (acquiring bank) and the card scheme (VISA/MasterCard/AmEx/Discover). The typical process flow is shown in the diagram. What Square does, is it acts as a link between the payee’s phone and the payer’s card scheme. In return, it charges a fee(called a Merchant discount rate or MDR) – typically 1.5 -3 % of the total transaction amount.

Source: UniBul Merchant services

So these can let me split my bills with friends, what else can I do with it?

When Dorsey decided to go beyond the 140 characters and set up square, he ushered the world into a new era – that of C2C payments! The possibilities are endless –

  1. For individuals:
    For people already reliant on their cards for most payments, these systems are going to make their wallets even lighter – by reducing the dependence on cash even when one is paying their friend. Cash is getting obsolete, especially in certain circles of tech-savvy consumers as online transfers, mobile wallets and now Square are dominating their payment modes.
  2. For businesses:
    This can work wonders for businesses, especially new or small entrepreneurs. Rather than investing in a Point-of-Sale machine (rental costs around $20 -$100 a month), they can let their phone do all the business. With features like advanced payment analytics and tracking, it reduces the need to keep accounts!
    In fact Strabucks – the US coffee giant has invested $25 million in the company, and now accepts payments through Square!
  3. Third party providers:
    There lies a huge opportunity for third party developers that incorporate payments into their apps. Companies like BillMonk can develop a lasting revenue stream by partnering with Square or Paypal for this service. Analytics softwares and services can tap this opportunity to churn out apps related to payment tracking and control.

This sounds complicated, is anyone even using it?

Yes indeed, this application has become quite popular in the United States, where it is currently based. IncWire stated that around 40,000 businesses used Square by February 2012

There are a number of reasons why such payment applications are flourishing

  1. Increasing reliance on cards:
  2. Even though the number of cards has been fairly constant over the past decade, card spends have increased exponentially over that time. This reliance on cards for payments of all sizes has fuelled the need for a C2C system.

    Source: US government Census report

  3. Growth of SmartPhones:
  4. In the US, smartphones have outnumbered other phones for the first time this year with a 50.4% market share. Android and iPhones account for almost 80% of this market. This phenomenal growth is also a driver for increased acceptance of mobile payments mechanisms.

    Source: TechCrunch

  5. Growth of Social Media:
  6. Apart from bringing the world a little closer, Social Media has changed one more thing – it has made technology acceptable – to the masses! By increasing awareness about newer payment mechanisms, it has ensured that they are adopted quickly

It seems that card payments through smartphones are here to stay. More proof comes in the form of competition – two major players in the E-Commerce and online payments space – Groupon and Paypal – have come up with their own versions of this product. In fact, both of them are aggressively pushing for share in this ever-expanding market by offering lower MDRs than the others. It is difficult to identify which companies will succeed in the attempt, but customers are the clear winners in the game.

So, do you STILL pay by CASH?

– Sahil Patwa

Sahil is a PGP 1 student at IIM Ahmedabad and member of the Consult Club. As an Associate Consultant at Ernst & Young, he was involved in the launch of India’s first domestic debit-card system and other projects in the electronic payments space. He is passionate about technology, new business development and Web 2.0. Sahil holds a B.Tech in Mechanical Engineering from IIT Bombay.