“Square” Pegs Mobile Payments – Round Hole Still Not Filled

A new way to Square up!The latest issue of Wired has an interview with Twitter co-founder Jack Dorsey on his latest venture – Square. If you’re not familiar with Square, it’s a simple way for merchants to accept credit card payments through a little device that plugs into their phone.

Square has now shipped a half million card readers and is already processing over $3 million a day in transactions; it’s growing like wildfire.

The Square business model represents a big disruption to today’s payment processing market and could be an important stimulus to local economies. But that’s not why I’m highlighting them. These guys are rolling out features that look like an even more revolutionary shift in commerce called “Vendor Relationship Management.” But that’s not what Square is actually doing, and it’s worth understanding how a choice of business model can get in the way of building really disruptive, good-for-the world services.

Luckily, there may be hope on the horizon with the recent announcement from Google that it is getting in the electronic wallet business – and that could change everything.

How it Works

As a merchant, when you set up an account with Square, you get you a cool little credit card reader that plugs into the jack of your iPhone, iPad or Android phone. It also gets you an app for managing your purchase transactions.

Taking a swipe at today's credit card businessThere’s no setup fee. All you pay is 2.75 percent of the transaction price per swipe, which is a nice simplification of today’s terms, pricing and processes for accepting credit card payments.

How This Changes Things

Square is applying the Clayton Christensen disruptive innovation model to the market for payment processing. Start simple, penetrate the low end of the market and then use volume (and network effects) to work your way up-market.

Many of Square’s early adopters are really small-scale, local merchants who now operate in the cash economy. Yes, many of these folks currently work in black or gray markets (which will be a problem for Square), but there are also millions of people who sell stuff at local farmers market and street fairs, and millions of small-time landscapers and carpenters and other providers of local services for whom Square is perfect. For these small businesses, Square represents a much easier payment solution than having to have customers run to the ATM for cash or even writing out a check.

This is a new market for payments and Square services are likely to stimulate whole new types of businesses that could be an important stimulus for local economies. Think, for example, about a new generation of local entrepreneurs fed with GigWalk assignments and paid by Square. It could make a real difference in peoples’ lives.

The second class of early adopters are slightly bigger, independent businesses that already have credit card payment solutions but are looking to save money and get better functionality than what’s available from today’s payment processing machines. For some of these merchants, Square’s 2.75 percent fee represents a real savings.

The even bigger draw for these merchants though is better management of their sales data and better connections with customers. To this end, Square just announced a new app for the iPad called Square Register, which gives merchants a “Google Analytics-like” dashboard for managing all the transaction data that’s run through Square. It will also give merchants some very innovative tools for staying in touch with customers – but more on that in a minute.

“Register” is Square’s run at the Point-of-Sale (cash register) market. Over time, as the Christensen model predicts, bigger merchants will be tempted by the Square model because of the way it improves the retail shopping experience for customers. If you’ve recently shopped at an Apple store, then you’ve experienced the way employees on the showroom floor can check you out with specially-equipped handheld devices. It streamlines the checkout process in a way that really does improve the shopping experience.

One of the reasons Square is positioned to do well is that – in addition to its disruptive innovation strategy – it’s also running a market-bridging strategy; the kind you need when markets are in transition, as they are today with mobile payments.

The big shift now heading our way is the rise of the electronic wallet. It’s been predicted for years, but we are finally starting to see real progress in integrating payment processing with near field communications (NFC). Google, for example, made a big announcement yesterday about its plans for an electronic wallet for Android based on NFC (more on this below) and Visa is doing its own experimenting. But Visa is also taking an unspecified stake in Square – which suggests that they too believe it will take a few years for NFC to take hold.

Netflix didn’t beat Blockbuster by jumping straight to online distribution of movies. Many people, including the folks at Blockbuster, viewed all that shipping of DVDs through the U.S. Mail as a quirky distraction, but it turned out to be a brilliant market-bridging strategy. Today, Blockbuster is history, and Netflix is the dominant player in movie rentals both offline and online (their movie streaming currently accounts for 25% of North American Internet traffic!). Once NFC is available on a critical mass of phones, you can bet Square will shift to this new technology. But in the meantime, they are busy grabbing up market share based on a tweak on today’s solutions. Smart.

What About Us Shoppers?

This is just a mockup - but it's pretty close to what it looks like. Remember I mentioned that the Square Register also has some innovative tools to help merchants stay in touch with customers? Well, that’s the Square “Card Case.” When you buy something from a merchant who’s using Square, he or she sends you a link to the Card Case app for your phone – preloaded with a card for their business. Over time, you’ll add cards from other Square businesses that you buy from as well.

When you click on a merchant’s card in the Card Case, you’ll see your transaction history with that merchant – kind of like a consolidated, organized view of all your receipts from them.  Once that merchant has run your credit card, you’ll be able to simply pay them directly from their virtual card in your Card Case (they’ll then run the charge on your card at some point later; it’s kind of like running a tab at a bar).

You can bet that Square will be rolling out all kinds of interesting features down the road to help merchants build customer loyalty and help them promote specific products and services. It’s a smart approach to facilitating commerce – and it definitely makes Square a company to watch.

What is Vendor Relationship Management (“VRM”)?

This is cool stuff. And there’s little doubt in my mind that Square and its fellow payment revolutionaries will radically change the way we buy stuff. But there’s one very important sense in which Square is just the latest rehash of the same tired story.

A few weeks ago, while at the Internet Identity Workshop in San Jose, I found myself drawn into to pretty much all of the sessions having to do with “Vendor Relationship Management” (VRM). While there, I also had a chance to talk with some of VRM’s main champions, including chief VRMer, Doc Searls.

I had heard about VRM years earlier, but never paid it much serious attention. Now that I’ve taken the time to dig into it, I’m here to tell you that there is something quite interesting to this stuff. It’s part of a broader technological trend now unfolding that I’m calling the “personal web.” I think it’s so important that I’ve added a “Peronsal Web” category to this blog and a “Personal Web” section to the blogroll (to the right) to help you connect with folks working in this area. I’ll be adding to both over time.

So what is Vendor Relationship Management and how might it transform commerce even more radically than what Square is doing?

VRM is a set of tools to help customers aggregate and manage their relationships with merchants on their own terms. It’s about flipping the model so that the merchant is no longer at the center, and the customer is. In the old world, companies aggregated and managed all their relationships in a Customer Relationship Management database. When, as a customer, I interacted with that company, all of the data generated from that transaction stayed with the company in this database. VRM flips this. It centers the data with me and I share it, as needed, with the companies I work with – on my own terms.

One of the foundational premises of VRM is that it works on behalf of the customer. If you’re planning to buy a new TV, your VRM tools will help you decide which model is the very best for you – and it will help you buy it on terms that are the very best for you. If you care about the planet, it will overlay sustainability considerations along side product features and pricing variables. You’ll be able to tune your VRM tools with a myriad of other variables as well, and it won’t be difficult because you’ll be able to swap in filters from various people and organizations whose values map closely to yours. There’s lots and lots of cool stuff to elaborate on here, but we’ll have to save those details for another day.

Conflicts of Interest

Again, the key thing to remember about VRM is that it works for you. VRM tool builders don’t get a cut of the sales going through the tool. They don’t get incentives to push this product over that product and there’s no advertising dollars to subsidize the cost of the tool. You pay for the tool and the tool works for you. Period.

This isn’t the world we live in today, of course. We’re used to a world where we use third-party shopping services like Amazon for free. It costs a lot of money to manage all that information and build all the software that goes into making an easy-to-use shopping service like Amazon. I know. I used to run a very large car online buying service and managing all the data needed to make that service work was a significant portion of our total costs of operation. Like Amazon, our business model covered those costs by simply marking up the end price of our products to customers. This is the standard retail model and it’s one we all understand and have come to expect when we shop online and offline.

It’s because of the success of this model that the idea of actually paying for a set of tools to help us shop seems downright strange. But there are two reasons why we are likely to find ourselves doing just that in the years to come.

The first reason that VRM tools will eventually take off is that the cost of managing shopping-related data will drop precipitously with the rise of the Semantic Web. I wrote recently about a demonstration Google is now doing with semantic search for recipes. These “smart” recipes now allow us to assign specific ingredients (like chicken, butter, pine nuts and mint) and Google will magically pull the right recipes from a wide range of sites. The cost of building tools for managing and manipulating this kind of data are will soon proliferate and when they do, the cost of organizing information will drop like mad. Once that happens, the economics change and you’ll be able to buy a really great grocery shopping app for your phone that will work in any grocery store and only cost you a few bucks. And because you paid for this VRM tool – it will work for you – not the grocery store.

The second factor pushing us toward a world of VRM is the growing awareness and concern around the privacy, safety and value of our personal data. One of the reasons we’ve gotten so used not paying anything for the online services we use is that these services are harvesting valuable personal data about us that they are then turning around and reselling to other companies. Most of Facebook’s high valuation is directly related to the goldmine of very personal information about you that’s locked up tight in the Facebook vault. VRM moves all that personal data back to you so that you’re in control of it. If you choose to, you will have the option of sharing it with merchants as you shop, but you will expect to be compensated for it in the form of lower prices or special services.

Thinking Outside the Square

So how does all this relate to Square? Well, on the surface, Square’s Card Case actually looks a bit like a VRM tool. But it’s not.

Square’s business model is based on the standard retail paradigm. The Card Case experience is very merchant-centric. You open a merchant-specific card within your case and that’s the way you shop for a shoe or a pineapple. But in a true VRM app, you simply say you’re looking for a pineapple and the tool helps you choose where to go.

Square makes more money when your Card Case motivates you to spend more – even when that may not actually be in your very best interest. That’s a direct result of the underlying business model that Square has chosen, and, by rolling out Register and the various tools it has for helping merchants promote themselves, Square is moving even further in that direction than the credit card companies. Square is not VRM.

I’ve got nothing against Square or what they’re trying to do with their business, by the way. If I were them right now, I’d probably be making very similar decisions. The NFC infrastructure and availability of semantic data just simply isn’t quite developed enough to make the economics of the VRM model work right now.

But it will one day very soon, and when that happens, get ready Square, because it will be you that will be disrupted. Doc Searls has some interesting thoughts on Google’s launch of Google Wallet. I agree with what Doc’s saying. Google has proven with Android and other technologies that it’s very willing to disrupt existing business models in order to achieve its mission of organizing the world‘s information and making it universally accessible and useful.

Square is well set to make money for the next several years. But over the long-haul, I wouldn’t bet against the disruption of VRM – and if that’s where Google’s betting, then that’s where I’d put my bet.

About Gideon Rosenblatt

Gideon Rosenblatt writes about the impact of technology on people, organizations and society at Alchemy of Change. He is a technologist with a background in business and social change. For nine years, Gideon ran Groundwire, a mission-driven technology consulting group, dedicated to building a more sustainable world. Prior to that, he spent ten years at Microsoft in various marketing, product development and management positions, where he developed CarPoint, one of the world's first large-scale e-commerce websites. Gideon was raised in Utah, lived and worked in Japan and China for several years, and now lives in Seattle with his wife and two boys. More details on Gideon here.
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13 comments

  1. Great analysis Gideon. The VRM concept is very intriguing but I wonder what factor ultimately tips the scales in favor of consumer control. Sellers will always have much more incentive to distribute information about products than buyers will have to gather that information. People do use reviews and product comparison tools currently, but those tools are themselves financed by advertising.

    It seems that a major function of a VRM tool would be to tell you what you don’t need, what product messages not to listen to…not sure how much anyone will be willing to pay for that. What is the killer feature that convinces people to adopt and pay for such a tool?

    The only thing I can imagine that would resist the temptation to push volume would be some sort of tool designed specifically as an attention filter.

    • Thanks for the comments, Greg.

      I think that with the coming semantic web, some of our assumptions about how much work it actually is to gathering information on products will no longer hold. We will set our parameters of what it is we’re looking for and the information will flow to us. So as you rightly point out, much of the value here is filtration. I think that that filtration will happen through an iterative process on whatever the equivalent of the search results page ends up being. Try playing with Google’s recipe search for a hint on how this might feel:
      http://www.google.com/landing/recipes/

      i think we’ll be able to subscribe to a variety of filters aside from the basics, so that we’ll be able to apply triple bottom line types of filters to help us choose our purchases in ways that better align with our values. Those screening and certification services are already out there, they just don’t have a critical mass of people using them today because they’re a hassle to find – today. But with a semantic web, it will be much easier to integrate them.

      The business model for all this is still unproven. And I think there are some real questions there. But again, sometimes when the economics shift whole new business models become possible, and the cost of aggregating data are going to come crashing down with the semantic web. It may well be that we see an explosion of mini VRM-like apps for shopping within specific verticals as the cost of producing these apps drops by orders of magnitude. So in effect, we might end up having to pay a buck or two for a really killer shopping app for your next camera. Would we do that? I don’t know. I think the jury’s still out on that, but it does seem entirely possible.

  2. I wrote a post last week that is at least tangentially relevant (http://onthespiral.com/how-much-monetization-enough), which linked to a post by Clay Shirky on micropayments (http://www.shirky.com/weblog/2009/02/why-small-payments-wont-save-publishers/):

    “The essential thing to understand about small payments is that users don’t like being nickel-and-dimed. We have the phrase ‘nickel-and-dimed’ because this dislike is both general and strong. The result is that small payment systems don’t survive contact with online markets, because we express our hatred of small payments by switching to alternatives, whether supported by subscription or subsidy.”

    I think Clay is absolutely correct. The challenge for VRM will be getting over the hump of providing at least $5/mo in value such that the payment itself doesn’t feel like being nickel and dimed. I have noticed quite a few freemium apps starting to offer annual subscription, for example Pandora at $36/yr, because $3/mo is almost too small an amount to make a decision about.

    So perhaps I could envision something like this working as a freemium service, but I have trouble seeing how it gets over the advertising barrier for the majority of users (those who don’t upgrade to the premium service). I simply don’t buy enough consumer stuff to ever convince me to pull the trigger on a paid service.

    I don’t mean to be a wet blanket. I intend more to be playing the devil’s advocate because I do think it is a very compelling idea…just having trouble seeing the transition path to fully ad-free product.

    • Gideon Rosenblatt

      You have good reason to be skeptical, Greg. When I was at Microsoft working on e-commerce stuff, we had conversations with the folks at Consumers Union (Consumer Reports). They were very frustrated with the web and how it broke the pay for content model of their magazine subscription. There were a couple of problems. The first is that people are not used to doing micro payments on the web. People got used to a model based on advertising on the web. But there is a different precedent now with mobile: http://techcrunch.com/2010/05/16/iphone-app-sales-exposed/

      Most of this VRM stuff will end up being delivered via mobile because lots of commerce happens in a place. In fact, we seem to have just reached a tipping point in terms of people’s time interacting with apps supposedly just passing their web browsing: http://techcrunch.com/2011/06/20/flurry-time-spent-on-mobile-apps-has-surpassed-web-browsing/

      So, more people using apps and a proving willingness to pay small amounts for apps.

      That said, there *are* major hurdles here – and I’m saying loud and clear that I think there is a real question whether people will actually buy VRM to guarantee it isn’t influenced by ads or other 3rd party forms of compensation. So don’t worry about sounding like a wet blanket. I may be trying to wring out the blanket, but it feels pretty damp to me too. And if Google steps in to run this along the lines of the semantic search stuff I pointed to, you can bet that there’s another form of compensation behind it – namely gathering our data. In that case, the question is what control we’ll have over it.

      Thanks for the continued stream of thoughtful comments.

      • The app model does require a response so here is my initial attempt at thinking this through…

        Apps and content are very different sorts of goods. Apps are things we buy once and expect to use for a long time. In that situation the buyer psychology is analogous to the impulse buyer purchasing a physical good off the sale rack. We are comfortable with these impulse buys because our potential loss is bounded (the amount of the purchase) while our potential gain is much greater (the potential value of using a given widget everyday).

        Content generally has very different dynamics. The value of most content is short lived and not at all apparent until after you actually consume it. Micropayments for content are undesirable because the maximum loss is unbounded…you will be back again tomorrow and the next day paying for new content over and over again.

        In this sense music acts more like a physical good because we listen to it repeatedly. It does not act like most other internet content which is generally consumed only once. Perhaps this dynamic would be different if content micropayments were married to a cloud service like evernote (an info equivalent of iCloud) that automatically archived and organized all the content you purchased for easy future reference.

        VRM or any similar service would have to behave more like music than like news. It would have to be something we reuse on a regular basis. If it is only relevant for those purchases significant enough to require research or customer organization/coordination, then I am simply not going to use it often enough to justify payment. And, I’m not sure I really need coordinated buying power when dealing with the local take out restaurant or the grocery store. That stuff I am happy to have subsidized by ads on yelp.

        • Gideon Rosenblatt

          Yeah, this is a good point. We don’t mind paying for things that we use again and again, which could be a problem for VRM unless there’s a way to effectively bundle these kinds of tools across a wide variety of products and pay for it once, rather than feeling nickeled and dime each time we use it. That’s kind of how Rhapsody does it with music. I pay a monthly subscription and I get to download all kinds of music. I’m not dissuaded from trying new stuff, because it’s all bundled into my price (unlike the iTunes model). I could see someone like Google stepping in to provide a kind of uber VRM tool, which then handled back-end payments to the specific schema and app developers for each product/service slice that the VRM tool provided.

          I’ll have to think about this some more. Clearly, the jury is still out on all this. I’m reading a great book called Pull by David Siegel, on the power of the semantic web to transform business. It’s a great read if you want some additional background on how the semantic stuff might flip some of our models around with all this.

          • Gideon Rosenblatt

            By the way, more interesting thoughts on VRM from Greg here:
            http://onthespiral.com/intention-economy-evolution-of-relationship-management

          • Yeah, I used the subscription of version of Napster for a while after it went legit and really enjoyed being able to try anything without worrying about individual payments.

            A system supported by payments themselves would actually be an interesting middle ground, for example if google took a small percentage of any transaction through google wallet. Google would still have incentive to get you to increase total volume of payment, but it wouldn’t necessarily have any interest in pushing any specific products.

            In a way that is what amazon has become. Many of the products you find through amazon aren’t ever actually handled or marked-up by amazon. Amazon just makes a commission on the sale and the products are shipped directly from the producer, wholesaler, or small time retailer.

            I’m now realizing that I have seen an interview with Jeff Bezo’s in which he talked about this. His claim was something like – We want to give buyers as much fair and accurate information as possible. We don’t care what you buy so long as you buy something, and informed buyers buy more.

  3. I just received a new agreement from square they want $275 per month for transactions at least $400 per month. I’m not giving them 68% of my sales! Back to PayPal !

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