Twitter founder Jack Dorsey’s new venture, a portable
point of sale device linked to mobile phones, has had shipments
suspended after hardware shortages and concerns about fraud on the
devices. Charles Davis investigates why the launch of the product
proved premature and looks at some of Square’s


Despite some well-publicized
glitches in product availability, the hottest entrant to the
portable card reader market remains confident in its future and has
assured its quickly-growing customer base that the delays are just
bumps in the road.

Square – the portable card reader
created by Twitter co-founder Jack Dorsey – has already been dogged
by hardware shortages that caused shipment delays, and further lags
in availability have the user base grumbling online.

The buzz around Square remains
palpable, however, at least in part because the management team has
remained so remarkably transparent about its problems, in perfect
keeping with an internet-only company.

When the latest delays emerged,
Dorsey wrote customers an e-mail stating that more delays remain
likely, as Square wants to work to shore up the company’s
fraud-mitigation capabilities.

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“The way we are handling the risk
of charge-backs and fraud is through transaction limits, but we
have received feedback that those limits are too low,” wrote
Dorsey. “We are rethinking and expanding our underwriting
infrastructure to address this issue… we have let our excitement
get the best of us and have released parts of Square before they
were fully-baked.”

The fraud detection issues,
critical to any new entrant to the cards industry, came to light as
Square gradually expanded the market trial phase of the company’s
square-shaped card reader that attaches to a smart phone’s
audio-input jack. The company still plans to begin shipping the
device to general users this summer, but clearly underestimated the
complexities of the payments business.

For example, the $100 initial cap
on the size of payments Square users can accept caused a fair
amount of complaints, although the amount gradually increased as
Square gained more information about the account holder.

In June, Square released its
self-described “activation flow” model that enables users to submit
more information, such as the type of transactions they plan to
conduct, their federal tax identification number and other details
in exchange for higher limits.

The tension between satisfying a
huge customer base while managing risk is a constant in the
payments business, and while Square’s activation flow risks
alienating some small merchants, it’s a calculated gamble the
company cannot afford not to make.

Perhaps Dorsey said it best in his
message to customers: “We need to strengthen our underwriting
infrastructure so that we can handle the huge demand for readers
and still manage the risk of charge-backs and fraud.”

It must also do so while
maintaining its eye-catching pricing advantage. The Square card
reader is free, and there are no activation or monthly maintenance
fees. Square charges 2.75% of the sale plus $0.15 for swiped
transactions and 3.75% plus $0.15 for keyed-in, or
“card-not-present,” transactions.

If Square can get the risk formula
right, it has a game-changing proposition in offering vendors as
well as consumers detailed data derived from the transactions.

As Dorsey has said, the receipt
from every Square-handled transaction can be instantly e-mailed to
the payer, providing details of the item and its price and the
merchant’s address, phone number and website for future

The Square receipt also could
include details like a map of where the transaction took place and
the number of visits the payer has made to that merchant over some
specified period of time. This would prove invaluable for customer
returns or complaints, challenged transactions and accounting
during tax season.

But it’s on the merchant side that
Square really advances the model. Merchants can use the receipt
data to build loyalty programs by tracking how often customers make
purchases, and how much they spend. For smaller merchants, such
data has never been captured at all.

All this from a plastic coin-sized reader that simply plugs into
the headphone jack on an iPhone or Android-based phone and
interfaces with the phone’s software, then processes transactions
through Square’s secure servers.


Top five: Portable POS - main players