This week in Product | Strategy | Innovation we will expand on update [U4] where we introduced Square’s two growing and continually overlapping ecosystems for Sellers (serving small to medium-sized businesses ) and Cash App (serving consumers as a digital wallet). These also serve a growing list of strategic corporate partnerships.
In this update, we will focus on the origin of Square and the creation of its Seller Ecosystem. This research serves as my own due diligence to further verify my conviction to the company as an individual investor. I am not a financial advisor and encourage any one who is interested to do their own research, but I’m sharing my findings here just in the spirit of paying it forward and nothing more.
Just like Daniel Ek was not a solo founder of Spotify, Jack Dorsey also had another co-founder for Square. But Daniel Ek and Jack Dorsey are the visionary co-founders, major owners and operators of their respective companies as CEOs. Dorsey is also co-founder, major owner and CEO of Twitter. Dorsey co-founded Twitter based on an interest in dispatch, microblogging and text-based status messaging and served as its original CEO for approximately 2 years to navigate 2 successful fund raises and create a novel messaging platform. He was eventually replaced as CEO by co-founder Evan Williams due to Dorsey’s other interests that competed for his time in a fast growing tech startup venture. Those other interests included yoga and fashion design. Dorsey served as Chairman of Twitter after Williams became CEO. Dorsey returned as CEO of Twitter in 2015 and has served in that role ever since.
The Founding of Square
In the period after being replaced as CEO of Twitter, Dorsey pursued other interests and reconnected with a friend Jim McKelvey in St. Louis where Dorsey grew up. The inspiration for Square came about when McKelvey wasn’t able to complete a $2,000 sale for a piece of art he created because his small business did not accept credit cards. Dorsey and McKelvey co-founded Square in February 2009 and initially ran the company out of St. Louis. The Square Reader was the company’s first product launched in 2010 and also inspired the name of the company. The Reader was a small square-size device with a 3.5mm audio jack to plug into a smart phone to process credit cards. The user just had to swipe a credit or debit card’s magnetic strip in the Square Reader to process the transaction using a Square mobile app.
Square’s early Readers had strong encryption and neither credit card numbers, nor magnetic strip data, nor security codes were stored on Square devices to protect personal information. Square continues to invest into its hardware and software technology stack to comply with various standards to compete with the latest point-of-sale (POS) transaction systems.
Point-of-Sale hardware systems
Restaurants, local coffee shops, clothing stores, salons, gift shops and other small to medium-sized businesses (SMBs) transact business with a customer at a “check-out” point or register. When cash was the primary means to transact a sale, cash registers were used to enter each item for purchase towards a subtotal, add any sales tax and produce the final sale amount. Cash was then collected to complete the sale.
More sophisticated POS systems have entered the market to process credit cards to offer more options to complete more sales. And newer systems today can speed up check-out by scanning item barcodes to manage inventory against both sales and returned items. More sophisticated POS systems can run reports by product (what is moving well and what is not) and customer history (who bought the most last month).
Square introduced the Stand in June 2013 to turn an Apple iPad into more of a point-of-sale system for SMBs to transact business with customers. Recent versions include an extension for contactless and chip transactions. The Stand is available at Best Buy for $169 with Square POS mobile apps available for download to handle basic use cases that span retail, food & beverage, and professional services. Square monetizes the software through transaction fees in person or online.
Square introduced Register in 2017 for integrated POS solution use cases like clothing stores that sell goods with a variety of needs. These include scanning barcodes to accelerate check-out, itemize purchased goods, update inventory, process returns and execute transactions with cash, credit cards and contactless technologies. The basic Register with 2 displays is $799 and various accessories allow the user to customize the solution to their needs like the own shown above at $1,466.
Point-of-Sale software
Square offers basic software for the Stand using mobile apps by Square and 3rd party developers. More advanced software for businesses using Register covers many business types.
Square for Retail helps manage inventory with counting and forecasting, purchase orders, managing & printing barcode labels, vendor management, etc. Retail businesses can also use Square to sell online with shipping or in-store pickup, build websites to enable advanced e-commerce services and social media integration. Check-out is streamlined with many features. Reporting is supported by many features including inventory category, profit margin and cost of goods sold. HR functions span payroll, labor and sales reporting and timecard reporting. Transactions are supported by many payment options. The pricing model includes a free option for primary services and then additional services for $60 per month per location plus transaction fees.
Square for Restaurants helps food & beverage businesses with advanced services for team management, payroll, transactions and customer directory to support operations. Growth is supported with loyalty & gift cards, digital marketing and capital. Order management includes on-demand delivery, pickup and in-house delivery plus delivery services from partners like Uber Eats, DoorDash, Postmates and others. A Kitchen Display System (KDS) option provides integration with the POS to communicate orders with kitchen staff. Key competitors to Square for Restaurants include Clover and Boston-based Toast, but Square appears to be a leader in the category. Stripe, Shopify and PayPal (with Venmo) are key competitors for online transactions and services, but could expand further into restaurants and other SMBs with a strategic acquisition of a POS system company.
Square for Appointments helps professional service business like hair salons book customers and accept payments online or in-person. Square also provides tools to help professional services grow like digital marketing, capital, loyalty programs and gift cards. Pricing is based on the number of employees and is free for solo operations, $50 per month for 2-5 employees and $90 per month for 6-10 employees.
Square Capital
A key advantage Square has over traditional banks is the real-time and low cost visibility into a customer’s small-to-medium size business. This allows Square to determine financial viability to offer growth capital from $300 - $100,000 separate from credit worthiness. If a business has adequate cash flow to offer a loan, Square has the opportunity to use a portion of card sales it processes to repay the loan. Square Capital has extended $8.1B in funds to 435k businesses from May 2014 through December 2020. This includes processing PPP loans to businesses during the pandemic. These Square Capital loans do not affect credit scores and do not require a personal guarantee.
Square responded to help their customers during the onset of the pandemic when restaurants and other small business were shut down due to stay at home orders. Square helped companies move their businesses online, offer gift cards, activate delivery services and process PPP loans. The results allowed businesses to adapt their operations to the challenge and then access PPP to bridge the gap in revenue to keep staff employed.
Additional services provided by Square to businesses include professional product photography for e-commerce, full payroll services, business tax preparation services and partnership opportunities for software developers to offer relevant business software to the Square community through the Square API. Square also provides a generous affiliate program that pays when referrals convert into business for Square. This allows customers to help build out the ecosystem through their networks. Dorsey’s knowledge of social media through Twitter helps facilitate some of this grass roots development of extended ecosystems.
Square itself has acquired $50 million and then another $170 million in bitcoin with its own cash, but also allows its Sellers and their customers to transact business in bitcoin if desired. This supports Square’s ambition for Sellers to never lose a sale because they cannot accept a form a payment.
Square launched its free to download Cash App digital wallet to build a community of existing and potential customers for the Square Seller Ecosystem. As Cash App is used with more businesses that use Square POS services, money can be contained inside Square’s 2 Ecosystems that span Sellers and Consumers without the need for banks. In the future, businesses could be incentivized to direct deposit payroll into their employees’ own Cash App and offer Boosts as incentives to attract Cash App users. I will discuss Cash App more in an upcoming profile since it is such a key part of Square’s future growth.
Best,
Stephen
Nothing in this post is intended to serve as financial advice. Do your own research.