Am I The Only Person Not Excited About Square?

Twitter co-founder Jack Dorsey has soft-launched his latest startup Square, a merchant payment service that operates through mobile phones.

Square adds a small card reader to a phone (at this stage, an iPhone/ iPod touch, but with others to follow) that allows merchants to process payments via the phone, complete with emailed receipt. Those paying sign their names on the screen of the phone, and the system also supports basic face matching for an added layer of security.

At first glance, you can’t deny that the tech and idea is sort of nifty; using an iPhone as a payment gateway has a sort of cool future tech ring about it.

But likewise the targeting of the product seems to be all over the place. On one hand, Dorsey says that the product is targeted at small merchants who might not currently have access to taking credit cards, everything from someone selling tickets to a school event or products at a football game. And yet, the product is demonstrated in a coffee shop.

There’s two distinct markets here: merchants who would likely already accept payment by card, and those who are either to small, or are occasional sellers who can’t justify getting, or can’t obtain a merchant account.

Lets start with existing merchants. The case doesn’t make a lot of sense unless Square competes on cost (Wired notes that they haven’t disclosed their merchant fees yet,) undercutting significantly existing merchant options. That might offer potential, but likewise breaking into the established merchant payments market isn’t easy. Many smaller to mid-size businesses will already be locked in with existing merchant agreements. Add to that the use case: how hard is it for a customer to hand over a credit card or walk up to a counter to settle a bill at a coffee shop for example? The tech to do on-the-spot payments already exists, and isn’t widely popular. Indeed, the only place I’ve seen it is in an Apple store.

For smaller fry, there may well be a market there, but likewise if this market is so ripe with opportunity, wouldn’t someone have tried to tap into it previously? Square isn’t exactly entering an immature financial services marketplace, the market is very much mature. The problem with small fry is that the potential of many users is outweighed by the cost of servicing them. Lets not forget that the merchant fee Square will charge will be on top of the rates they’ve negotiated with Mastercard, Visa and others; to be appealing, the margin between the wholesale and retail merchant charge (between what Square pays, and charges) can’t be huge.

But lets play devils advocate and say that as an idea Square starts out strongly and signs up a sizable number of merchants, proving that the lower yield end of the market offers potential with mobile tech. Although not all US banks might be in the best financial positions of late, that ignores that there is still very much the ability to enter the mobile payments market, leveraging existing merchant facilities (for small retailers) and existing customer relationships (with current non-merchant account holders) to quickly introduce a competing product…or 3…or 5…or more. The market then becomes a margin game, and with a relatively small funding pool of $40 million (I know that’s a lot of funding, but compare it to what banks make) Square could quickly be crushed.

Again, I like the tech and it is sort of nifty, but the business case seems to be based on lots of wishful thinking, and some luck along the way thrown in for good measure. I’m not saying that it can’t or won’t succeed, but we’re pushing casino odds in this case. Very few people take on the big banks and win.