Payments

Micromerchant's true Pain points, POS debate

A lot of people asked me on different forums that, what are the merchants that Square really supports and how many of them?

I think this quote applies most fittingly to gain a perspective on this subject:

“It is the obvious which is so difficult to see most of the time. People say 'It's as plain as the nose on your face.' But how much of the nose on your face can you see, unless someone holds a mirror up to you?” ― Isaac Asimov, 1965

A Reflection Of The Numbers

To gain true clarity in the tech world one must step outside of marketing messages and perhaps, the well meaning tech writers and friends. It is important to separate perceptions from reality.  This requires a perspective. To gain a perspective we should first view the entirety of the US market in 2012 in actual dollars in Payment Cards processed and percentages of marketshare this represents.

Chart showing 11 companies with about 79% of total dollar volume of Payment Cards processed in the US, the remainder is held with about 100 smaller entities.  First Data's processing also includes Wells Fargo, Citi Merchant Services and most of BA Merchant Services along with others yielding over 70% of Payment Card processing in the US.

Square's Phenomenal Growth

I want to be very, very, clear, Square has had robust growth since the launch in late 2010.  Three years later they went from $0 to about $10 billion dollars in projected annual 2013 Payment Card transaction processing. This is truly phenomenal growth and no matter how you view it, this is an amazing thing.

To understand the market size and challenges moving forward from this point in 2013 we need to look deeper in to the market potential.  Square's projected numbers do not include Starbucks for a number of reasons. Jack Dorsey and most at Square have been wise to break this number out. Starbucks Payment Card volume is private information but the primary reason is that the Starbucks relationship is not nearly the same relationship Square has with the rest of its merchants. With Starbucks, Square is acting as an ISO (reseller) for Chase/Paymentech.  This is true because of the size of Starbucks and the rules Visa and MasterCard have instituted.  Thus Square is certainly not going to earn the same potential income from Starbucks as compared to the other merchants that Square is processing for.

Square's Marketshare Vs. Potential Market

Square has focused on creating easy Payment Card acceptance to what is known as Micromerchants and even today it is about 99.99% of the company's merchant base.  They just about defined and created this market segment.

The Micromerchant potential market size is estimated to be about 25 million merchants.  Within this band of merchants there are a vast array of merchant types that are processing less then <$25,000 per year in Payment Card transactions.  Micromerchants also represent merchants that may only need to accept a Payment Card rather infrequently.  Some Micromerchants may use the service just a single time and not have a need in the future.

What do Micromerchants sell?  Services and products, just like Traditional merchants.  However Micromerchants the concentration is in low ticket services and low ticket retail items.

Micromerchants are a vastly larger category of merchants then Traditional merchants.  It dwarfs all of the Traditional merchant categories by a huge magnitude. But they are difficult to account for in estimations and reports. Only a fraction of the micro-merchants has adopted modern POS.

With the best estimates, in 3 years Square has reached <2%, or about 2 Million of the potential market segment of 25 million Micromerchants. It is estimated that the entire Micromerchant market segment would represent just about 10% of total transaction volume if a single company held over 90% of the marketshare. Micromerchants have far less stability and a rather high failure rates.   There are a number of very important resaons for this. One reason is the very, very low barrier to start a Micromerchant business with very little capitalization to no capitalization.  Business failures in this segment can run into the 50 percentile in the first year alone.

Chart showing the percentage of market share based on general merchant category with relationship to percentage of total Payment Card transaction volume.

The Sky Is The Limit?

Square has been diligently working to simultaneously expand market penetration into vast potential pool of 25 million Micromerchants while reaching upmarket to the 5.5 million small Traditional merchants.  Square had garnered about a spectacular 2 year head start in the Micromerchant market but now faces PayPal, Intuit, major banks and 100s of other competing services.  They helped define this market but attrition in this segment is rather high.  Complicating the business plans of all competing companies is the fact that many Micromerchants actually use 3 or 4 services at once further diluting potential income and transaction volume.  There are simply no barriers to stop a Micromerchant from applying for every new service that enters the market and many have.  There currently is no brand loyalty and this presents an issue to all companies in this market segment.

Larger Opportunities With Larger Merchants

Thus Square is looking for more stability of upmarket merchants. The Square Register and Square iPad Stand is one solution for Square, there will be more.  The premise and the hope Square has is that Payment Card acceptance has been a "pain point" to small Traditional merchants.  This is based on the assumption that these merchants do not like the $99 cash register and free credit card terminal they currently use.  Of course from a tech perspective this 1970s era technology appears to be a problem for these merchants.  There is also the assumption that these existing merchants have opted not to computerize their businesses for the last 20 years (95% have not) because all solutions offered by 100s of companies have been unacceptable for any number of reasons.

Beautiful and inspired design of the $299.99 Square "Stand".  The Cash Till, Printer and iPad are not included.

Ask Your Favorite Small Merchant, "Is Your Cash Register Broken?"

I have worked with small and medium Traditional merchants for about 30 years and can say with direct empirical experience that merchants in this segment as a whole do not view Payment Card acceptance or old cash registers as a true pain point.  Of course they would entertain saving money, but this is not the true driving force.  Nor do these merchants feel they are missing deep revelations that only "big data" can satisfy.  The reality is Quickbooks, for example is used by about 80% of this merchant segment.  These merchants have had access to "big data" about the business they run, via a true accounting system for over 20 years.  However it is the least used major feature in Quickbooks.

Common Sense 

I know this sounds to be contrary to "common sense" with us in the tech world. But this is the reality. There is a very slow to no uptake to technology in this merchant segment. I addressed this subject with respect to independent restaurants here:Restaurant Business: What percentage of restaurants have mobile websites or standard websites?

The findings:

  • 95% of independent restaurants do not have a mobile website
  • 40% do not have menus that can be read online
  • 50% do not even have a standard website

Finally, the small Traditional merchant market is also far, far more competitive and far, far more complex with specialized solutions serving 100s of segments in this market space.  In this segment there are 1000s of Banks and companies serving this market.  It will not be "easy" for any company, no matter how well financed to even reach this market let alone understand the true needs this segment of merchants have.

Can Square Beat $0?

One should also not discount the huge impact PayPal made by just announcing $0 costs to process Payment Cards for retail merchants for the entirety of 2013.  I vigorously publicly and privately advised Square not to start a price war that they could never hope to win.  PayPal is in a far better position to win any price war (for alto of reasons) and they have shown this by reducing costs to merchants to $0.

Huge Markets And Huge Potentials

I have been asked to answer this question numerous times and have thus far choose not to.  I am clearly biased, I obviously love Square shown by the many answers on Quora that I have produced on the company. I also have very close friends that work at or formerly worked at Square.  This is not an attempt to rain on anyone's parade.

I want to be clear, the payments market is a huge market with huge potentials. This is a realistic view of a slice of time.  Everything is in a constant state of change.  But history is an amazing tool that can illuminate paths of opportunity.  Empirical experience serves as a great editor.  When used correctly it allows companies with the wisdom to work with people that hold true empirical experience it affords a focus in things that are truly broken.

To Henry Ford, "We Need Faster Horses"

Sadly if you ask merchants what they want, with Moleskin notepad in hand, you will likely not get to the 20 things these merchants really need. It is like as if Henry Ford asked the Pony Express if they need an automobile to move the mail.  They would tell you they perhaps need faster horses.

I see a tremendous amount of opportunity for Square and other startup that are working to revolutionize the payments industry.  But experience counts. Reality counts. Too much time can be wasted by fixing things that are not broken, just because there is better technology. Merchants are and always will be Practical and Pragmatic.

Thus I will leave this the way I started it, with the amazing insights of Isaac Asimov:

“It is the obvious which is so difficult to see most of the time. People say 'It's as plain as the nose on your face.' But how much of the nose on your face can you see, unless someone holds a mirror up to you?” ― Isaac Asimov, 1965

Brian Roemmele

Brian Roemmele, is a mobile payments expert and an avid blogger at Quora. His profile can be found at http://www.quora.com/Brian-Roemmele. Brian is an Apple enthusiast and has deep interests in writing about new technology in payments.

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