June 29, 2011
Square Raises $100 Million, Valued at $1 Billion
Square, the mobile payments provider best known for the free one-inch credit card "reader" that plugs into a smart phone (iPhones and iPads at first) and allows anyone to accept both credit and debit-card payments, has rasied $100 million in financing, with a $1 billion valuation, the Wall Street Journal reports.
The valuation will worry some observers, confirming a possible investment bubble in Internet-related start-ups that promises much pain when the bubble finally does burst. But Square's rapidly-growing transaction flow also indicates that mobile payments are finally, after many false starts, getting traction.
Square's value proposition also highlights the complexity of roles in the new mobile payments ecosystem. Square sells a service built on a new type of point of sale terminal (the "square" adapter) and so might be said to compete with VeriFone. However, Square monetizes the terminals in a different way, essentially making its money on transaction fees, as do credit card and debit card issuers. In that sense, it competes with bank card providers.
Square also competes with Intuit (News - Alert), as both Intuit and Square provide special value for small retailers and other non-traditional retailers. Many expect PayPal to make its move into retail commerce, at least in part, with its own point of sale system designed to be used by smart phones or tablet devices.
Square also has launched "Card Case," an app that would let users pay directly from their smart phones. That makes Square a contestant in the digital wallet space, where Google, among others, plans to focus.
Square’s apparent success, and that of Starbucks, which operates what is arguably the most-successful U.S. mobile payments service, also illustrate something else about the mobile payments, mobile wallet and mobile money businesses. As is the case for telecommunications, the number of networks providing the infrastructure is limited to a number of firms.
One reason Isis decided not to follow its original business plan, which would have entailed building a retail, branded alternative to Visa and Mastercard ecosystems, is that it is an expensive, time-consuming and difficult undertaking.
One might argue that the mobile payments business likewise will have a limited number of transaction clearinghouses and a similarly limited number of store retailer choices for payment terminals. Think of those parts of the business as the wide area optical network and the local access networks.
There will be many more retail brands that offer payment or wallet front ends using the base of terminals and retailers and transaction settlement networks. That’s a bit like the way retailers buy wholesale services, create infrastructure and add other service attributes to create a retail product. Think about mobile virtual network operators or competitive local exchange carriers, for example.
But the communications business has thousands of other firms in the business, other than the largest transport and access providers, and in addition to thousands of over-the-top service providers. There are suppliers of all sorts of other necessary services.
In the same way, there will be many thousands of specialized partners targeting niches in advertising, marketing, promotion, devices, components, commerce, content and support services.
Square and Starbucks provide evidence of those trends. Square has extended point of sale terminal capabilities to non-traditional retailers. Starbucks created its own captive mobile payments system primarily to provide loyalty-related business value. Square and Starbucks both operate in clear niches. And that is where much of the innovation will happen.
"AT&T challenges Visa, MasterCard" is an irresistible and compelling headline. So is "PayPal, Google, Facebook (News - Alert), Apple fighting for dominance in mobile payments." Whether the implied competition is direct, indirect or largely fictional is hard to address at the moment. Six months ago it seemed as though AT&T and Verizon Wireless (News - Alert) were on a collision course with Visa and MasterCard. That no longer seems to be the case, and it has taken just six months for matters to change.
Nor is it likely that PayPal (News - Alert) and Google are interested in the same parts of the ecosystem. Google cares about advertising potential. PayPal, on the other hand, clearly cares about transaction revenue and the "float" on prepaid accounts. Apple (News 
- Alert) might be more concerned about boosting the value of iTunes in ways more directly related to content. Facebook almost certainly is more interested in online forms of social commerce.
Some parts of the ecosystem will feature only a few big players. The settlements process is an example of that. Other parts of the ecosystem will see lots of suppliers of value that run “over the top” of the mobile payments infrastructure. So far, Square and Starbucks are among the early winners, in part because they both chose clear niches.
Gary Kim is a contributing editor for TMCnet. To read more of Gary’s articles, please visit his columnist page.
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