Mar 8, 2010

Is Square a threat to Verifone?

A recent article in TechCrunch makes it seem like a major war is on between Verifone and Square. It is amusing how the Silicon Valley can get all hot and bothered when one of its heroes (in this case a co-founder of Twitter) launches a new startup.

In terms of hype and mindshare, Square is definitely running strong against Verifone, at least in the microcosm of Silicon Valley. This may be what Verifone is fighting. Given Verifone’s proximity, the battle of hype in the valley might be an important one to win. Or it might be an unnecessary diversion.

I occasionally run a two-hour workshop for MBA students in Singapore called “The Art of Entrepreneurship”, in which I provide a basic framework to increase the chances of success of a new project or venture. The framework applies to new startup ventures as well as projects launched within large organizations. The workshop explores several major failures that have happened in the payments industry when fundamental questions were not asked, and looks at successful products and services in comparison. Square fails the test.

Successful ventures provide simple and compelling answers to three fundamental questions: so what, who cares, and why me? Answering these questions can be difficult and painful. Take biometric payments. The promise sounded something like this: “Biometric payments let customers shop without their wallets.” So what? How can I leave my wallet at home if most stores don’t let me touch my thumb? How big of a hassle is it to carry a wallet? Who cares? The average shopper? Or the person out jogging who doesn’t want to carry money or cards yet still wants to stop at their favorite coffee shop. Is that a big market? Do those people care enough to adopt your service? Will retailers be interested enough in that market segment? Not too long ago, a silicon valley company called Pay By Touch raised $340 million, hired over 800 employees, and promptly went out of business.

Does the product resemble vitamins, painkiller, or cocaine? With vitamins, buyers are concerned about their future well-being and will pay for something that could improve their lives sometime in the future. They will think seriously about ROI before buying. The vast majority of products fall into this category. With pain killer products, buyers are much less price sensitive. They are in pain now and want relief immediately. With cocaine, buyers find themselves addicted and can't get enough of your product or service. Think iPhones and social networking. Twitter is of course in this category.

“Why me?” That’s the question that defines the soul of the new venture. What is your special story that makes this venture something that nobody other than you could launch? Here is Square’s answer, taken from their website: “In February 2009, Jim McKelvey wasn’t able to sell a piece of his glass art because he couldn’t accept a credit card as payment. Even though a majority of payments has moved to plastic cards, accepting payments from cards is still difficult, requiring long applications, expensive hardware, and an overly complex experience. Square was born a few days later right next to the old San Francisco US Mint.”

The process I describe in my workshop is demanding and humbling. You ask yourself hard questions, over and over again until the answers are compelling.

“Why you?”

“Because my partner wanted to sell a piece of artwork and couldn’t.”

“OK, interesting. But, so what? Why you?”

“I was co-founder of Twitter. I’ve got lots of clout and visibility. I know everything about social media.”

“OK. This is about payments. So why you? Also, what was that bit about the San Francisco US Mint? What’s that got to do with anything, other than maybe appeal to Silicon Valley readers?"

You get the picture.

Participants in my workshop get animated and excited when they are going through these questions. I have them work in groups of 5 or 6, and have them send one person up at the end to present their project to everyone. The class then grades each project based on how compelling the answers are. Major weaknesses are immediately apparent and can be focused on for improvement.

Square would fail this process miserably.


Robb Lejuwaan said...

Great post. I've been asking these questions about Square to myself and thought I was the only one!

One thing seems clear Silicon Valley and social media/tech sites love Jack Dorsey.

Anonymous said...

Well said. Particularly troubling is Square's refusal to speak on the record with reputable media organizations like the American Banker. They seem to be going out of their way to build as much hype as possible without undergoing the scrutiny that other products do.

Other basic questions that Square fails:
- how can your product be distributed? Remember, this is hardware; you can't just download it. Verifone has a whole channel already in place.
- how will you support it? Again, hardware can't be fixed with a download.

Anonymous said...

Great to see you have so clearly and succinctly stated the skeptical questions I usually ask about virtually every new venture. I can't understand why the VC's never seem to take that approach. Pay-by-ZTouch has long been my favorite poster child for a bad business model. I could not see any market for their technology aside from nudist colonies, but the money kept pouring in. Ditto for Square... What's wrong with using a regular card terminal? What retailer in his/her right mind is going to hand out iPhones to the employees? The only market for Square is street artists and hookers.

Anonymous said...

PayByTouch is in a league of its own. The CEO of PBT was a fundraiser and, if the press articles are to be believed, a partyboy. He was not an operator, and the VC's he met with, including me, knew it and would not give him a penny. In fact, PBT raised most of its money from foundations and family offices for that reason. The CEO pitched dreamland projections and demanded a fairy tale valuation.

TBK said...

Interesting. Whether Square will fail or not difficult to predict....but if you have really been a merchant and supporting all these fees, merchant account charges etc ...i am sure you would see what improvement is really required. It is more like a "prepaid merchant account" without much constraints and charges as you traffic. Just like Mobile Operators have moved the mass markets from postpaid to prepaid ( pay as go).
The little i know abt payments is that "Merchants and those small businesses make it work or fail" , generally not the buyer...and Square happens to very well understood that.
I would just say wait and see ...and do not predict too early who will fail...because he does not correspond to the standard payment "profiles" . Coming from the social network does not prevent a smart entrepreneur to succeed in different markets ...and honestly, the payment industry requires fresh blood from completely different industries.