What should we learn from Square?

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If you regularly follow new advances in credit card technologies and/or what the founders of Twitter are up to (and really, who doesn't), then you've almost certainly been hearing constantly about Square since its launch earlier this year. Square is one of many companies trying to "fix" the credit card industry, in their case by allowing anyone with a smartphone to accept credit card payments at a rate of 2.75% plus a 15 cent charge for each transaction. To do this, Square offers a free phone peripheral to it's users that enables credit card scanning, thus lowering the risk of fraud and it's associated costs. In effect, Square's goal is to enable people to accept credit card payments without paying huge upfront costs.

While Square certainly isn't the first to try and take advantage of the seemingly huge problems with the credit card industry, they've received a lot of press recently, on the back of a good deal of marketing through both traditional and online media. The buzz around the service was large enough that I decided to sign up for Square a couple months back to check them out, and I certainly wasn't alone as Square has had a huge number of signups.

It turns out that Square wasn't quite ready for all those signups, and the buzz has started to take a somewhat sour turn. Even a couple months ago, Square's problems were somewhat evident as there was a stated 4-6 week delay between signing up for the service and receiving the scanner. While these manufacturing problems are apparently resolved, an email sent out to Square users last week pointed to an additional issue:

"The problem has transitioned to ... a credit processing and risk issue. We need to strengthen our underwriting infrastructure so that we can handle the huge demand for readers and still manage the risk of chargebacks and fraud."

Basically, Square isn't able to financially cover the risk for fraud associated with processing as many credit card transactions as people want to make through Square. To mitigate this risk, Square is planning to start requiring credit checks of it's users, a measure that is almost certainly going to turn off a huge chunk of those currently interested.

Obviously, most of the press of late has been decidedly negative, and there's no question that Square did a poor job of estimating the demand for it's product (at the very least) and possibly the real costs associated with it's products. Despite that, I'm really not sure if Square did the wrong thing when they decided to launch at the beginning of this year. It's easy to say in retrospect that they should've held off on a launch until their manufacturing was up to the task, but my guess is that if they'd launched a year or two later, they would've run into similar problems. Startups just don't have time to worry about preparing for what happens if their product is successful beyond their wildest expectations. If the underwriting issues are just a product of too much demand, the same argument applies. If the issue is instead of a result of misestimating the risks associated with their userbase, I have trouble faulting them for not adequately assessing that risk in a population that by it's very design has never accepted credit card payments before. If that's the case, I again don't think that an extra year or two of planning would've made a huge difference.

In short, I really wonder if Square is as well off as they reasonably could be even with all of their current problems. We've talked previously about evolving your business, and the benefits of launching your business early (advice we took ourselves with Less Annoying Software). By launching when they did, Square has collected information about it's demand and risk that it couldn't have possible acquired pre-launch. Furthermore, it seems like they realized the problem before anything particularly catastrophic happened, and then made changes, and informed their customers rather than trying to hide their problems. If Square had launched 6 months later, I think there's a good chance that the only thing different is that I'd be writing this post in the winter.

There's a certain amount of devil's advocacy at work in the above, as I'm not sure exactly how I feel about Square's problems of late. It's hard to praise any company that has made as many mistakes as Square seems to have, but at the same time, it's hard to fault a company that has grown as fast as Square has in the past year. So I'll leave it at that. If you've got a particularly strong view one way or the other, the comments await.

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