It’s hip to be Square; Twitter inventor has new venture


ST. LOUIS, Mo. — It was in February that Jim McKelvey ran into the problem that would lead to the birth of Square, a new mobile-payment venture led by Twitter inventor Jack Dorsey.

McKelvey — one-time employer and longtime friend of Dorsey, a St. Louis native — was trying to complete the sale of one of the pricey glass faucets he makes at Third Degree Glass Factory in St. Louis. It was a deal that fell apart after the buyer insisted on using American Express, a credit card his small business couldn’t accept.

“I said to Jack, we should solve this problem,”
McKelvey said. “It began with a lost sale and the frustration of a
small merchant.”

Nine months later, the two partners revealed their
proposed solution to a tech community thirsting to know the next move
by the man whose microblogging service, Twitter, changed the way people
connect and share information.

At its heart, Square is rather simple. It’s a small
plastic device, or dongle, that plugs into a cell phone’s audio jack
and allows anyone, including small merchants and individuals, to accept
credit card payments. The credit card owner uses a finger to sign a
receipt on the phone’s touch screen.

In some ways, it’s a pronounced change from the
status quo that requires every business that accepts credit cards to
have its own merchant account — a type of bank account used to process
payments. Often, small-business owners don’t have them because they’re

But now Square says smaller businesses and
individuals will be able to piggyback on its merchant account, opening
the world of credit card sales to people and businesses locked out by
current restrictions.

The idea of such a thing has left many in the
financial services sector scratching their heads — and in some cases,
rolling their eyes — at Dorsey’s upstart company, which will have
offices in San Francisco, New York and St. Louis. Some argue it’s simply impossible to take a credit card without having your own merchant account.

They also want to know how much it will cost to use
the service. It’s expected that each transaction will include some sort
of fee to pay for Square’s operations, as well as the fee — typically 2
percent to 3 percent — charged credit card companies.

The uncertainties surrounding Square have left analysts like Aaron McPherson, of research firm IDC Financial Insights in Framingham, Mass., less than impressed.

“It’s largely just hype at this point,” McPherson said. “I wouldn’t put too much stock in it.”

Not everyone agrees, however. Square’s first round of venture capital funding valued the company at $40 million. And while large credit card vendors have been quiet about Square, Mastercard this week said it welcomes “innovation in the competitive payments industry.”

Some of the mystery surrounding Square can be traced
to Dorsey and the way Twitter has grown. Much of that company’s success
— there’s even talk now that it will be profitable this year after
signing search deals with Google and Microsoft — can be credited to its willingness to follow the lead of users.

Consider the recent addition of a “retweet button”
allowing users to quickly rebroadcast other users’ updates. It simply
made it easier for people to do something they were already doing.

McKelvey suggests a similar path for Square, now in early testing with some 300 merchants in San Francisco, New York and St. Louis.

“We don’t know where this is going. If done right, the market will tell us what the uses are,” he said.

For now, the company expects to go after businesses
not big enough to have their own merchant accounts. That means they
don’t expect to take much business from competitors. But McKelvey said
they’ve had inquiries from clothing retailers interested in a system
that would let employees do checkouts anywhere in a store.

There’s also the possibility Square could prove popular for transactions between people making deals on Craigslist and the like, though it’s not something the company appears to be counting on.

Still months away from an expected launch during the
first quarter of 2010, the company already has its share of critics.
Some wonder if there’s a viable market for what Square is offering.

“He’s really going after the bottom-of-the-barrel merchants,” said Andy Kleitsch, chief executive for Seattle-based Billing Revolution, which has a system that lets merchants send bills to customers’ cell phones.

Kleitsch and others have been quick to point out
that Square offers little that’s new. Several companies already have
mobile payment systems, some using specialized devices and others using
cell phones. The key difference is that everyone else requires a
merchant account.

That includes a new mobile device expected to hit
the market just ahead of Square. PAYware Mobile also uses a card reader
that attaches to a cell phone and targets lower-volume businesses. A
key difference is that PAYware is made by San Jose, Calif.-based VeriFone Holdings, a longtime industry veteran that handles 65 percent or more of all credit card transactions in U.S. stores.

Paul Rasori, senior vice president of global markets for VeriFone, said the device will be ready to ship next month.

“We’re pretty much ready to go to market,” Rasori said. “This is the real deal.”

That Square already has a strong competitor
illustrates one potential problem for the young company. If successful,
it’s going to be vulnerable to competition, said Sherif Nasser,
assistant professor of marketing at Washington University’s Olin School of Business.

The thing that makes PayPal, an online payment
system, successful has been its ability to create a large base of
connected users — you can only do business through PayPal if both of
you have an account.

But Square won’t have that same captive audience,
Nasser said. Credit card users aren’t obligated to use any particular
payment system. There’s nothing stopping a larger company from creating
serious problems for Square.

“If I were Apple or Verizon or AT&T and this proves to be viable, I’d want that business for myself,” he said.

And, as it turns out, it wouldn’t be all that hard
for someone to build a system remarkably similar to Square. That’s
because the man who helped create the card reader had a falling out
with Dorsey and McKelvey.

Bob Morley, an associate professor of electrical engineering at Washington University,
worked with the pair earlier this year and has applied for a patent on
the device. But after months of negotiations over compensation failed,
they basically agreed to go their separate ways, with Square saying it
would use something different for card reading.

The professor says he has no ill feelings toward
Square: “I just want to get my story out there. It’s actually my idea
and it’s for sale.”

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