Square, founded by the creator of Twitter, lets people accept credit cards with their smart phones. That innovation could transform transactions in surprising ways.
In one of the conference rooms, Jack Dorsey, a slight 34-year-old who speaks in quiet, measured tones and smiles seldom (and then only gently), told me he soon discovered that there were good reasons why ordinary people couldn’t accept credit cards: the payment system is extraordinarily complex, opaque, and expensive. More, the complexity benefited a number of established interests.
“If I start a coffee store and I want to accept credit cards because no one uses cash or checks anymore, there’s this massive friction,” Dorsey explained. First, one must apply for a merchant account from a bank or through an independent sales organization (ISO), a middleman that serves smaller merchants. The application requires a credit check, which can take a week. There are startup fees of $35 to $40. One must buy hardware, which can cost as much as $900 for a system that’s wireless and mobile. Transaction fees can be to $15 to $25 a month, even if customers don’t buy anything.
“So there I am,” said Dorsey. “I’ve got my cash register I bought from Costco for $700 that’s basically a calculator with a cash box. And now I’ve got this other ugly box for taking credit cards. And when someone finally wants a cappuccino, I’ve got to type into the first box what they’re buying, and then type into the second box the number that comes from the first box, and then swipe their card, and then give them a piece of paper to sign and the receipt from the first box, so now they have two receipts—and it just becomes this mess.”
“And that’s just to get started,” added Keith Rabois, Square’s chief operating officer, who formerly directed business development at PayPal and LinkedIn. “The way the payments industry works is obfuscation. Everyone teases you with low rates like [a] 1.7 percent [charge on transactions], but the real rates are much higher.” Accepting payment with a debit card might incur the lowest rate for the merchant; a charge card such as American Express might demand a 2.79 percent fee on transactions; but a credit card, which is asking the merchants to subsidize its rewards program, might charge 4 percent.
Square’s innovative payment system eliminates all of this: there’s no credit check, no hardware costs, and no fixed costs. For any transaction, Square charges 2.75 percent plus 15 cents, a blended fee from which it repays the card companies and earns its profit. That’s it. (UPDATE: On February 22, Square dropped the 15 cents charge: their fee is now just 2.75 per transaction.)