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 competitors
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.
“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 reference.
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.