Mobile-Payments Startup Square Discusses Possible Sale | Hacker News Reader

Mobile-Payments Startup Square Discusses Possible Sale

online.wsj.com

65 pointscoloneltcb62 comments

I said for months and years that Square was absolutely myopic and slow-moving when it came to online transactions and developing and releasing an API (which still does NOT exist).

Stripe came in and absolutely crushed them.

Square deserves it. They had huge first-mover advantage and massive popularity early. I will do mid six figures through Stripe in the next 12 months and all of it - 100% of it - could have gone through Square had they simply spent a few weeks exposing and documenting an API.

Embarrassing.

Square's primary problem is not the lack of an API.

Square's problem is that the margin on processing physical credit cards is razor thin, especially if you are just using other people's networks. My thought has been that Square will eventually launch its own credit card network once they have a large enough share of the credit card processing market.

Square could have launched an API and done what Stripe did, but the problem of processing credit cards over the Internet are different from the problem of processing physical credit cards. I don't think that anyone could have simultaneously succeeded at both.

They already process cards over the Internet with Square Marketplace. They clearly were interested in entering this area, but fell years behind everyone else despite having years+ first mover advantage.

Shopify won the marketplace part, and also launched POS, which is a direct competitor of Square. http://www.shopify.com/pos

I remember emailing Tristan O'Tierney back in 2012 asking about an API after having seen that they had allowed a small beta group access to an API [0,1]. His response was just that they'd decided against moving forward with it -- not sure of the specifics but they had at least gotten that ball rolling at one point before deciding to focus on other things, would be interesting to hear more about that decision.

[0] https://groups.google.com/forum/#!topic/square-client-api/c0...

[1] https://groups.google.com/forum/#!topic/square-client-api/7x...

You'd have to have a really large part of the acquiring market, if you hope to get consumers to use your new card brand.

The idea of Square doing tang seems similar to the idea of imo.im getting people to use their own IM network in preference to the popular third party ones they already support.

It might be doable but there would need to be a hook for cardholders, like cash back, loyalty points, analytics etc.

How exactly do you know Stripe is crushing it?

"Stripe Raises $80M ... At A $1.75B Valuation" [0]. I think it's safe to say they are crushing it.

[0] http://techcrunch.com/2014/01/22/with-an-eye-to-internationa...

Valuations do not mean you are "crushing it", or that "crushing it" will mean anything in three month's time. Take a look at Zynga for an example.

Eh, these are people that had a look at Stripe's financials and decided to invest in it at that valuation. I'm not going to speculate on their actual numbers, but I trust that Sequoia and co have a good idea what they're doing.

https://connect.squareup.com/docs/api

And Square's valued at 3 times that. Yet this story is all about how the actual performance is rougher. So I ask again, how do we know Stripe is actually crushing it? (Also why does a question like that get down voted?)

http://techcrunch.com/2014/01/13/putting-squares-5b-valuatio...

Also, Stripe's "$1.75 billion" valuation is misleading because the round was for preferred shares, which have privileges (and lower risk than common stock). We saw something similar for AirBnb, which Marc Andreessen pointed out in a series of tweets:

https://twitter.com/pmarca/status/457017580385873921

Square's valuation was based on common stock.

Stripe did not crush Square. Their core products are not competing in the exact same market. Stripe core is online processing of payments and Square is physical POS for everyone. There might be some overlap in the processing but that is not Square's core product and main selling point.

I think Square and Stripe can easily co-exist - the more pressing issue, as far as I can see it, is Square's model won't scale very well at all to EMV ('chip and PIN') cards, which severely limits their market.

Square's current magstripe reader is very simple, and thus cheap to produce to the point where they can give it away. EMV readers are not cheap. They must be certified, and are far more complex. I was in an Apple Store in London a few days ago and they were selling PayPal branded EMV readers for about $150.

Even if we assume a very healthy markup on that price, given the margins Square is on they cannot afford to give away a reader that would cost them ~$50 to produce. It changes their entire business model. Square have offered no indication of how they plan to support EMV cards once they become widespread in the US (which will eventually happen), other than 'you can still swipe the magstripe', which whilst true also usually means the fraud liability remains with the retailer, rather than the bank.

I saw this limitation with EMV a few years ago, it concerned me that they wouldn't be able to move into EMV markets quick enough, and we already have PayPal, iZettle and a few other smaller companies in the UK and Europe supporting EMV cards.

However, I then spoke to an ex-Square employee, one of the very early members of the team, and he told me that they weren't concerned at all about it, they had much bigger plans. I was skeptical, but I think Square Cash might be one of the elements of this bigger plan.

Stripe and Square don't remotely compete. Stripe is in a low-volume, high-margin world (flat fees), which is the opposite of Square's situation.

The other problem is that credit cards are set to go to chip-and-PIN in the USA (finally!) later next year. All the current readers won't be useful (at least if you don't want to shoulder the liability!)

Got a source on that? Cards with chips are still somewhat rare, so it's going to be a while before they become required...

http://blogs.wsj.com/corporate-intelligence/2014/02/06/octob...

The EMV liability shift will move the liability for non-chip transactions to merchants on Oct 2015.

You will see all your cards get issued with chip in the next year.

Actually, with all the press regarding recent data breaches (e.g. Target) you might see it happening before that. Some Chase and Citi cards are now being issued with chip.

My recently issued citi card has a chip.

"Cards with chips are still somewhat rare"

Do you mean in the States, right? Cards with chips are the default in most european countries...

This won't make Square obsolite but would require them to provide new and most likely more expensive reader solutions for POS clients. Europe switched to Chip&PIN but most POS devices are really expensive and in some countries mostly rented to merchants (at least in Finland it's common). iZettle [1] is really similar to Square, but with chip&pin, in Europe and they have faced some scrutiny from Visa [2].

[1] https://www.izettle.com/

[2] http://www.arcticstartup.com/2013/02/20/izettle-solves-the-v...

Super interesting that the Starbucks deal was a $20m loss. I swear back then I read Square, or maybe it was Keith Rabois, claim that Square was making money on the deal. Knew it was bullshit because they also claimed Starbucks was saving money on processing with Square. That just didn't add up. Makes sense now to hear this.

Overall, not shocked at the situation. A lot of people like to compare Square to Apple. Superficially the product design is comparable (simplicity, elegance).

But a HUGE difference is that Apple has always targeted products that have generous margins. Payment processing is a commodity, microscopic-margin business. Square Cash is outright operating at a loss. Not at all Apple-like.

It's cool they initially went after a segment more tolerant of a relatively fatter fee: the underserved very small business / individual proprietor market. But at the same time, there's a lot of advertising, support and perhaps even fraud costs with that segment. And crucially, it's hard to move upmarket to bigger businesses that demand a more competitive processing fee.

It would be sweet for a company like Square to take a fresh, Apple-like take on the point of sale market. But sadly that doesn't seem compatible with the sheer amount of venture funding they've taken on, which demands a highly profitable multi billion dollar market. They would practically have to take over the entire world of POS to make that kind of money on it, meeting resistance to fat margins and bearing significant sales and support costs every step of the way.

No wonder they are positioning themselves as a "commerce" not "payments" company.. they need to look elsewhere for profits.

At this point, I'm afraid Square is just too expensive to acquire. The company does not have a solid business model: targeting micro-merchants is simply not profitable. And due to all the hype, the acquisition price is going to be very high to cash out all the investors.

Mobile wallet apps have not gained traction and Square marketplace looks like a giant distraction. Square is going to face incredible competition with card readers and POS products from Paypal, Apple, Amazon and Shopify.

PayPal, Apple, and Amazon are precisely the companies who would have the cash to acquire the company and the desire to do so.

I see Square going to Apple so that they can jump start whatever payments technology they're planning to unleash in the next year. Buying Square's merchants would be an excellent way to do that.

It's also good that their Square register is built on top of an iPad.

At a valuation of a few billion? Tell me what Square could do and Apple cant with those few billions?

Apple, as with its iPhone user base is large enough to offer its own Payment Network to complete with Visa and Mastercard. Although i dont see Apple wanting to do that either.

You overestimate the ability, dedication, vision, and internal political will of top tech companies to enter and dominate fields that are not their core focus.

Remember MobileMe?

Why would Apple destroy their amazing profit margins by buying a company that has razor thin margins at best? There is no chance that Apple will buy Square, they are much more disciplined in terms of watching their financial numbers than that.

Apple has amazing profit margins in their hardware business. Don't forget that they run iTunes and the App Store on razor thin margins and have made that work better than anyone else.

Razor thin? You're terribly mistaken. They take 30% on iTunes and the App Store. Payments company take BASIS POINTS. If you can make 100 basis points, you're doing better than Square or Stripe, maybe even combined.

I'm not mistaken at all. Outside analysis has suggested that iTunes & App Store aren't all that profitable at all[1][2] because they still have to meet the minimum transactions for processing credit & debit cards, which includes a flat fee of up to 25 cents.

[1] http://www.quora.com/Payment-Processing/How-does-Apple-do-pa...

[2] http://bits.blogs.nytimes.com/2008/08/11/steve-jobs-tries-to...

> Mobile wallet apps have not gained traction

"more than 11 percent of transactions a week now happening with a mobile device in our stores, and nearly 10 million customers currently using our mobile app"

http://news.starbucks.com/news/starbucks-accelerates-mobile-...

Seems to be all about proper implementation on both consumer and merchant side.

There's a big difference and scale of problem for open loop mobile wallets and the one that Starbucks has.

Maybe the problem with an universal mobile wallet is that the problem is too hard to solve given the current environment (and dependency on the credit card rails).

The only reason I use the Starbucks app is because of all the free drinks I get. If I didn't get around 1/3 of my drinks for free, there's no way I would go through the hassle of using the app.

As far as I know, you can still carry their plastic card that has the same reward structure. App mirrors the card functionality.

What happens, then? If Square goes out of business, does that hurt Silicon Valley overall? What about if they just continue as a zombie company taking huge amounts of. Only from dumb non vc investors to stay afloat? Or if they ultimately sell for a down amount?

A rushed IPO seems less damaging than these, but not sure if they can pull it off.

Square makes too much money to "go out of business". Worst case is that someone buys them for less than their investors hoped.

"Makes" in the sense of loses/makes negative, yes. (I guess they have positive gross margins, so they could always kill all R&D and then sell the core business to a processor or someone)

I'm a newbie to startups and Silicon Valley so correct me if I'm wrong. It seems like Square has spent a lot of money over the years. They come to our campus recruiting, have hired multiple students from the university I attend, I heard they've moved into a new expansive office this year and put in such a big effort. If all of this is going to waste despite the fact that Square is solving a real business problem (unlike so many many other startups), doing a startup seems like such a small possibility of success - its scary. As a college student, a lot of engineers tell me how much they learnt while working at a startup etc, but is it even worth it if legitimate problem-solving startups are failing like this? Is this model of being funded millions of dollars and then failing worth it? Is this a bubble thats going to burst some day and people will realize the we've just been illogical all the way along?

They did solve a real problem. They just tried to run a business organization more like a high-margin software business rather than a low-margin commodity business, which is what they are right now.

They can change that but they haven't yet.

Put another way, don't solve a problem if the cost to solve it is greater than solving it pays you.

The world of finance and credit card processing is one of the most ensconced and deep-rooted industries there is. It's one of those that can only be penetrated by a company with deep-pocketed backers, experienced executives, and ambitious entrepreneurs. You're literally going up against a global market of banks and institutions that control the transfer of money throughout the world. And they're going to do all that is in their power to keep the status quo. On top of that, anywhere there's transactions of money, you're going to have throngs of fraudster and hackers trying to game your system (refer to the history of Paypal for more on this). It's certainly a massive undertaking that also requires you to hire top-notch talent; hence, you also can't cut costs on things like expansive offices and recruiting perks.

> have hired multiple students from the university I attend, I heard they've moved into a new expansive office this year

It was their choice. They could've kept the company barebone-minimal and reached profitability at some point.

They chose to pursue a bigger story, and so far looks like their investors are on board with that.

>>As a college student, a lot of engineers tell me how much they learnt while working at a startup etc, but is it even worth it if legitimate problem-solving startups are failing like this? Is this model of being funded millions of dollars and then failing worth it? Is this a bubble thats going to burst some day and people will realize the we've just been illogical all the way along?

I can't say one way or another what Square's future is, but I know the the knowledge gained from working in start-ups is _priceless_ in this engineering tech field. Assuming you don't have people depending[1] on you, the earlier you have this experience the better off you'll be. After earning my BSCS I wasted[2] nearly 6 years in a ridiculous situation with a big corp.

Next, is Square really solving a real problem? This[3] is a real problem being solved, imho. The credit card swiping with smartphone/tablet thing I think is just a extremely handy convenience, but still a convenience. Also, as other comments have pointed out, in the next year or 2 there will probably be a huge shift to cards with embedded chips thus magstripe readers will be of limited usefulness.

1. Spouse/children/aging-parents. That's a personal decision; but even then I'd still argue that if you can find anyway to go for it while minimizing the worse-case scenario of things-not-working-out... do it.

2. No experience is truly a waste. If nothing else, I learned to identify when I'm getting played a fool in a dead-end, high-politics job of low career value. It won't take me 6 years to figure it out if it happens again.

3. https://www.indiegogo.com/projects/gravitylight-lighting-for...

The entire VC model is to give a companies money so they can grow faster than they could on their own income. Most fail, some succeed so big it makes up for all the rest. So you shouldn't consider the money wasted even when you see one of the many failures. Even very rich people starting their second startup still take VC money instead of using their own, because 1) why lose your own money and 2) the VCs will pull all their connections for you once they have skin in the game.

Can someone please explain:

"Square recorded a loss of roughly $100 million in 2013, broader than its loss in 2012"

AND

"Square would likely fetch billions of dollars in a sale."

How can BOTH these statements be true?

Easily explained. If an investor believes that a company has a bright future, the fact that it's losing money in the present may not count for anything. The investor may turn out to be wrong, but that's the reasoning.

Also, because of the nature of tech investments and the volatile character of the tech business, one can invest seed money in ten companies, watch nine of them fail, and still come out ahead.

Square's value comes from their customers. They've cultivated a customer base that is very valuable (small and micro-businesses) and very loyal. In particular, a lot of the brick-and-mortar businesses that use Square are very trendy and technology-friendly. If Square fails to eventually find a profitable angle I'm sure a company with deep pockets and diversified interests will.

Another similar company to keep an eye out for is ShopKeep POS. http://www.shopkeep.com/shopkeep-vs-square Found it at the Temple Coffee shops.

I actually enjoy using their interface a lot more than Square, and it seems to be more feature rich on the merchant end too. The main thing I have fun with is the ability to print your signature onto the receipt!

It would be interesting to look into all the developers of these POS swipe machines. What companies fund them? Credit card companies? Grocery store corporations? Just pure profit from sales of the devices? I know I see a lot of innovation on grocery store registers, and a lot of the visa swipe devices have been upgrading their interfaces consistently every few years.

ShopKeep seems to be the preferred OS at a number of the small independent shops in my area, too. Getting coffee shops and restaurants and their kin to migrate to newer software and technology is extremely difficult, so good for them.

Director of Engineer at ShopKeep here. Happy to answer any questions about the technical side of things. Some recent ShopKeep news: https://news.ycombinator.com/item?id=7641525

http://techcrunch.com/2014/04/20/square-and-google-were-not-...

Google/Square denies.

Don't believe anything until it is officially denied.

With the way Square has designed its business, it only makes sense as part of a larger company to whom the business is about adding value to themselves. Youtube is a great example: it couldn't survive in the long run unless acquired. Nothing wrong with this business model except that you have to find the right buyer before your model kills you.

This article includes the phrase "with the matter" six times, in case anyone was wondering.

Wow, $100m a year is a lot of money.

Could hire a team of 10 top notch devs for $200K + $100K in benefits for $3m/year. Supposing you had a sales staff that cost the same, that's $6m. Make it an even ten with hardware designers and support staff.

Wow. Napkin math can be powerful. This is the most insightful comment on the page.

Supposing you had a sales staff that cost the same

Napkin math tells you nothing of the quality of this assumption.

That is the cost of the staff salary and benefits only. There are many other HR related costs. But I presume the main expense at Square is partially the production and distribution cost of the devices and most likely the biggest chunk is all the loss leading business deals with vendors, credit card companies etc.

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