This case was prepared by Evan Meaghe

REVISED DECEMBER 19, 2016
©2014 by the Kellogg School of Management at Northwestern University. This case was developed with support from the June 2009
graduates of the Executive MBA Program (EMP-73). This case was prepared by Evan Meagher (Kellogg School of Management ’09)
with the help of Anirudh Parasher Malkani (Northwestern University ’12) and Andrew Tseng (Kellogg School of Management ’13),
under the supervision of Professor Sarit Markovich. Cases are developed solely as the basis for class discussion. Cases are not intended
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SARIT MARKOVICH AND EVAN MEAGHER ’09 KEL792
Hip to be Square:
Disruption in the U.S. Mobile Payment Market
Founded in San Francisco in 2009, Square finished 2012 as the darling of Silicon Valley; flush
with more than $340 million in funding, the firm had grown to several hundred employees in just
three short years. It processed more than $10 billion annually in credit and debit card payments for
small business owners that used Square’s smartphone-enabled card swipe device wherever cellular
or wireless Internet service was available.
However, Square’s success had attracted new entrants into the mobile payments processing
space, both in the United States and abroad, threatening to derail the company’s remarkable
trajectory. With its latest financing round valuing the company in excess of $3.4 billion,
management and investors were considering which strategies would continue—even accelerate—
the company’s growth.
Industry Overview
The earliest references to credit and debit cards date back to the 1890s. Their popularity
increased greatly in the 1920s when they were used as vendor-specific customer loyalty programs
by department stores, hotels, and gas stations. The 1950 advent of the Diners Club card—originally
issued on cardboard stock rather than plastic—that could be used at twenty-seven different
restaurants in New York City was a key development that led to the cards’ current ubiquity. The
development of software that could analyze consumer data to help issuing banks identify and target
the most profitable customers—those likely to carry balances and yet unlikely to default—further
accelerated adoption in the 1970s and 1980s.1
At the end of the twentieth and beginning of the twenty-first century, credit and debit card
transactional volume skyrocketed, reaching a combined $3.5 trillion in the United States in 2011.
Most of this growth came in debit card transactions, which grew 80 percent from 2006 to 2011.
Credit card transactions grew only 7 percent over the same period, but total credit card volume was
$2.0 trillion in 2011.

1
M. J. Stephey, “A Brief History of: Credit Cards,” Time, April 23, 2009.
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Paying with a credit card in the United States involved the following five parties (see
Exhibit 1):
x Cardholder—An individual who applied for and received a credit card
x Merchant—A retailer that accepted one or more credit cards as payment for purchases
made in person, online, and via telephone
x Acquiring bank—A bank that processed credit card transactions for merchants and
deposited payments into their accounts
x Issuer (also called issuing bank)—A financial institution that issued credit cards to
cardholders, billed cardholders for repayment, and assumed the risk of fraud and nonpayment
x Credit card association—An association that developed and marketed credit card brands
such as Visa, MasterCard, American Express, and Discover. The association performed
transactional operations on behalf of its members, including transaction authorizations and
processing, interchange settlements, and fee processing. Credit card brands were licensed
to issuers for a fee based primarily on the volume of transactions. In 2011 Visa and
MasterCard accounted for more than 70 percent of total transactional volume and had a
combined total of 1.6 million cards and 1.4 million active accounts.2
Innovations in Mobile Payment Processing
Credit card processing historically required a merchant to have a landline phone connection in
order to transmit the information necessary to finalize a transaction, but the proliferation in wireless
connectivity—both cellular and Wi-Fi—promised to free merchants from a fixed, wired connection
point. For example, by 2000 many taxi companies in major American cities used a traditional card
reader with a cellular connection so that the driver could accept credit and debit card payments.
Further development in the cellular market had subsequently enabled payment with mobile phones.
There were four primary models for payments using a mobile device: (1) premium SMS-based
payments; (2) direct mobile billing; (3) mobile web payments (WAP); and (4) contactless NFC
(near field communication) payments.
Premium SMS-based transactional payments allowed users to send payment authorizations via
text messages. The payment was then added to the payer’s monthly bill or debited from the prepaid
account. Once a successful payment was posted, merchants authorized the release of goods or
service agreements.
Direct mobile billing, also called direct to bill, was widely used in Asia and Europe to charge
purchases to a mobile phone account. At checkout, purchasers selected the mobile billing option
on their smartphones and followed a two-step authentication procedure, which usually involved a
PIN (personal identification number) and one-time password. After authentication, the purchaser’s
mobile account was charged for the amount of the purchase, plus applicable taxes and, in some

2
PaymentsSource, “Statistics,” http://www.paymentssource.com/statistics (accessed April 30, 2013).
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cases, a processing fee. Direct mobile billing did not require advance registration and did not
involve credit cards or bank accounts.
With WAP, consumers made payments by using a web browser or an application downloaded
and installed on a mobile phone. The transaction typically required the use of a credit/debit card or
pre-registration with an online payment solution such as PayPal.
More recent innovations attempted to eliminate the need for a card reader entirely by relying
on NFC technology. NFC used an RFID (radio frequency identification) chip in either a plastic
card (with a form factor similar to that of a traditional credit card) or smartphone device to
communicate with a radio frequency receiver. The interaction emulated two walkie-talkies
communicating with each other at a range of just a few centimeters, such that a light physical touch
of the card or phone registered the RFID signal, which eliminated the need for customers to swipe
anything through a magnetic stripe reader. The RFID chip contained all of the same information as
a magnetic stripe, but communicated it wirelessly. Although many believed that NFC technology
would become the leading alternative, the technology was missing from Apple’s iPhone 5S
smartphone. “It’s definitely troublesome for any developer looking to support NFC that it is not in
the iPhone,” said Jordan McKee, an analyst with researcher Yankee Group. “It’s not going to reach
massive scale without Apple adopting NFC.”3
The growth in mobile transactions was expected to accelerate as a result of further innovations:
mobile transactional volume was anticipated to reach $670 billion by 2015, with more than 80
percent of point-of-sale systems projected to accept mobile payments by 2016.4
Mobile Payment Competitors
With the proliferation of smartphones and ubiquitous Internet access, incumbents and new
competitors began innovating in the mobile payment processing space, some on the merchant side
and others on the consumer side.
MasterCard
MasterCard was the first company to introduce a contactless payment system. Tested in 2003
in Orlando, Florida, and later rolled out in the United Kingdom, PayPass was launched in the United
States in 2005. PayPass technology used a standard RFID-powered NFC chip that replaced the
swiping mechanism of regular cards with the NFC “tapping” function. MasterCard approached
issuing banks with accounts bearing the MasterCard name and asked them to issue PayPass-enabled
cards. Generally the cards were issued with the PayPass capabilities only upon the customer’s
request, although some banks—particularly in the United Kingdom—issued PayPass-enabled cards
without customer consent or notification.

3
Greg Bensinger, “Apple’s New iPhone Deals a Blow to NFC,” Wall Street Journal, September 12, 2013.
4
Jennifer Van Grove, “Kuapay Lets Mobile Users Pay with QR Codes,” Mashable, August 15, 2011,
http://mashable.com/2011/08/15/kuapay.
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As of March 2011, approximately 92 million PayPass-enabled cards had been issued
worldwide, with a total of 311,000 merchants accepting the cards.5
By mid-2012, MasterCard
Advisors indicated that PayPass adoption had not only driven an increase in spend of approximately
30 percent across low-, mid-, and high-spending consumer target segments but also had increased
consumer loyalty to the card.6
That traction among issuers helped drive merchant adoption of the
system; by the end of 2012, there were 700,000 active merchant accounts, a 27 percent increase
from the end of the prior quarter. This growth was significantly concentrated overseas, with nearly
40 percent of accepting locations in Europe.7
Google
In May 2011 Google launched Google Wallet, an Android
mobile application that incorporated PayPass technology.
After installing the app, users with NFC-enabled phones8
could add any of their current major debit or credit cards and
link them to a virtual MasterCard account issued by the bank
Bancorp. When the user initiated a transaction, the virtual
MasterCard facilitated the payment and charged the original
issuer of the linked credit or debit card. Like NFC-enabled
credit cards, Google Wallet required only that users wave their
phone over any PayPass terminal to pay for purchases. As an extra layer of security, however,
Google required users to enter a PIN to activate the application for each transaction.
Google had elected not to collect fee revenue from Google Wallet transactions. Instead, its plan
was to collect data. Google Wallet attempted to enhance the value of its offering beyond the
convenience benefit of not having to use a card or “carry a wallet” by partnering with large retailers
such as The Gap and Macy’s to offer its users special discounts and targeted advertising. The
discounts and ads used transaction data and locational information to attempt to make customers’
shopping experience much more than a card swipe.9
As of August 2013, however, iPhone had not
adopted NFC and Wallet worked only with a subset of Android phones, which limited its potential
market to the approximately 60 percent share of the U.S. mobile market held by Android OS

5
MasterCard, “MasterCard® PayPass™ Performance Insights,” http://mastercard-mobilepartner.com/performance_insights.html
(accessed April 30, 2013).
6
MasterCard press release, “New MasterCard Advisors Study on Contactless Payments Shows Almost 30% Lift in Total Spend Within
First Year of Adoption,” May 3, 2012, http://newsroom.mastercard.com/press-releases/new-mastercard-advisors-study-on-contactlesspayments-shows-almost-30-lift-in-total-spend-within-first-year-of-adoption.
7
Kiona Smith-Strickland, “MasterCard Reports 700,000 Merchants Worldwide Accepting PayPass,” NFC Times, February 8, 2013,
http://nfctimes.com/news/mastercard-reports-700000-merchants-worldwide-accepting-paypass.
8
As of April 2013, the Wallet app was available only on certain phones (Samsung Nexus S 4G, Samsung Galaxy Nexus, LG Viperâ„¢
4G LTE, LG Nexus 4 GSM/HSPA+, and HTC EVO 4G LTE at Sprint; Samsung Galaxy Nexus GSM/HSPA+, Samsung Galaxy Victory
4G LTE, and LG Optimus Eliteâ„¢ at Sprint and Virgin Mobile; Samsung Galaxy Axiom at U.S. Cellular; Samsung Galaxy SIII at Sprint,
MetroPCS, and U.S. Cellular) and tablets (Asus Nexus 7 and Samsung Nexus 10).
9
Other retailer partners included American Eagle Outfitters, Banana Republic, Bloomingdales, Champs Sports, The Container Store,
Footlocker, Guess, Jamba Juice, OfficeMax, Old Navy, and Toys R Us. See Google Wallet, “Where It Works,”
http://www.google.com/wallet/where-it-works.html (accessed April 30, 2013); Tom Loftus, “Google’s Place in Mobile Wallet Wars,”
Digits (blog), Wall Street Journal, December 6, 2011, http://blogs.wsj.com/digits/2011/12/06/google-place-in-mobile-wallet-wars.
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phones.10 Indeed, two years after its launch, Wallet had been downloaded fewer than 10 million
times.11
Visa and Isis
Visa launched its own NFC payment system, called payWave, in 2007. PayWave was similar
to MasterCard’s PayPass offering, but it offered no virtual wallet functionality, such as digital cash.
Despite Visa being roughly twice the size of MasterCard, payWave was accepted at only 150,000
merchants worldwide.12
After launching payWave, Visa attempted to popularize the service by partnering it with Isis,
a joint venture of mobile carriers AT&T, Verizon, and T-Mobile. In mid-2011 the three carriers
announced plans to invest more than $100 million in Isis in an effort to make NFC technology the
new standard for payment processing.13 Isis was card issuer–agnostic, working seamlessly with
Visa, MasterCard, Discover, and American Express. In response to its exclusion from Isis, Sprint
announced that it planned to incorporate American Express’s own digital payments platform,
Serve, into its Android phones.14
MCX
Established in August 2012, the Merchant Customer Exchange (MCX) was a joint venture led
by merchants such as 7-Eleven, 76, Bed Bath & Beyond, CVS Pharmacy, Dick’s Sporting Goods,
Gap, Lowe’s, Publix Super Markets, QuikTrip Corporation, Sears Holdings, Shell Oil Products
U.S., Southwest Airlines, Target, Walmart, and many others. According to the consortium’s
website, “Development of the mobile application is underway, with an initial focus on a flexible
solution that will offer merchants a customizable platform with the features and functionality
needed to best meet consumers’ needs.”15
The impetus to join MCX was centered around CurrentC, MCX’s payment initiative, as it had
the potential to allow participating merchants to develop their own payment services and thereby
avoid credit card transaction fees. The merchants also hoped CurrentC would be able to keep the
likes of Apple and Google out of their transactions. However, MCX was plagued with development
delays, and merchants began defecting. For example, Walmart announced in December 2015 that
it would move ahead with its own mobile payment app.

10 Eric Zeman, “Android, iOS Crush BlackBerry Market Share,” Information Week, May 24, 2012,
http://www.informationweek.com/news/mobility/smart_phones/240001008.
11 Mark Milian and Ari Levy, “Google Wallet Is Leaking Money,” Bloomberg BusinessWeek, June 6, 2013,
http://www.businessweek.com/articles/2013-06-06/google-wallet-is-leaking-money.
12 Visa, “Frequently Asked Questions about Visa payWave,” http://usa.visa.com/merchants/payment_technologies/paywave_faq.html
(accessed April 30, 2013).
13 Jordan Crook, “Isis: AT&T, Verizon, and T-Mobile’s $100 Million Gamble in Mobile Payments,” TechCrunch, August 29, 2011,
http://techcrunch.com/2011/08/29/isis-att-verizon-and-t-mobiles-100-million-gamble-in-mobile-payments.
14 Mark Hachman, “Isis Carrier Venture Signs Payment Deals with Visa, MasterCard, Others,” PCMag.com, July 19, 2011,
http://www.pcmag.com/article2/0,2817,2388712,00.asp.
15 MCX, “About Us,” http://www.mcx.com (accessed April 30, 2013).
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In May 2016 MCX announced yet another delay in CurrentC’s rollout. These recent difficulties
were likely related to PayPal’s acquisition of Paydiant, the company that powered the CurrentC
application for MCX.
PayPal
Not surprisingly, PayPal made clear its desire to replicate the success it had disrupting online
payments in the early 2000s. In March 2013 PayPal launched the Here platform. Blue and triangular
rather than square in shape, Here plugged into the audio jack of smartphones and tablets and
enabled users to accept card payments. Here also included an app that let merchants scan cards and
checks using the phone’s camera.
Parent company eBay also launched Android and iOS mobile apps that enabled PayPal users
to enact the same transactions they traditionally did through the PayPal website (see Exhibit 2). In
addition, it acquired a series of companies whose services seemed to support the theory that eBay
was assembling a full suite of financial services products that centered on a mobile payment
processing system. The acquired companies included:
x Braintree, a payment gateway company that enabled online merchants to receive online
payments
x Where, a geo-targeted mobile advertising service
x Zong, a mobile payments processing system
x Milo, an in-store product inventory service
x Red Laser, a barcode reader application
x Bill Me Later, a pseudo-credit card microloan service that enabled users to immediately
purchase items online and pay for them later through the mail or on their phones16
PayPal was also working on a virtual wallet. The
product’s final form and release date were unclear, as was
whether it would simply serve as an extension of the
existing PayPal mobile application or constitute an entirely
standalone product. It seemed likely, however, that the
system would enable users to transfer money from one
PayPal account to another by bumping phones together
using NFC technology; to purchase items by scanning them
in-store and either having them shipped or checked out at a register; and to pay for purchases using
a PayPal balance, a PayPal-linked bank account, a PayPal-issued credit or debit card, or PayPalissued retailer-specific coupons or gift cards.17 Though the product’s future was unclear, there was
great enthusiasm about the project; in a June 2011 press release that challenged five Bay Area
residents to conduct all of their transactions digitally for an entire year without using cash, PayPal

16 Rachel King, “PayPal Offers Sneak Peek of Upcoming Virtual Wallet Offering,” ZDNet, September 15, 2011,
http://www.zdnet.com/blog/btl/paypal-offers-sneak-peek-of-upcoming-virtual-wallet-offering/58145.
17 Jill Krasny and Lauren Brown, “Walkthrough: PayPal’s Mobile Wallet Looks Like an Awesome Tool,” Business Insider, November
17, 2011, http://www.businessinsider.com/pros-cons-paypals-mobile-wallet-2011-11.
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president Scott Thompson confidently declared that the physical wallet would soon become a thing
of the past.18
Merchants that accepted Visa or MasterCard paid on average fully loaded fees of 3 to 7 percent,
compared with 1.9 to 2.9 percent for PayPal.
Banks
According to Dan Wiegand, senior analyst at Corporate Insight, “The banks are wary of mobile
payments, but aren’t sure of how to get more deeply involved.”19 Not wanting to be left out but not
daring to bet on which technology would prevail, most banks were only experimenting with mobile
payments. JP Morgan Chase had an equity stake in Square and helped it process credit cards.
Citibank, which ran the pilot for MasterCard’s PayPass in 2003, offered a payment tag that could
be attached to the back of any cellphone and used with a PayPass terminal. In late 2012 Bank of
America launched a Square-like merchant solution called Mobile Pay on Demand for Android and
iPhone devices.
QR Codes (Starbucks)
An alternative to NFC payments arose from an unexpected source—the assembly lines of
Japanese automakers. First used to track vehicles through the assembly process, quick response (or
QR) codes were two-dimensional barcodes that could hold several hundred times as much data as
a traditional one-dimensional barcode.20 This inexpensive, secure, durable technology allowed a
smartphone owner to use the device’s internal camera to scan a QR code, which automatically
linked to a webpage, application, or other online interface. The use of QR codes did not completely
bypass MasterCard or Visa but offered mobile carriers an alternative to NFC technology that
required little to no new infrastructure. To use QR codes, consumers needed only a smartphone
capable of generating and displaying a QR code and vendors needed only a camera and scanning
software, which most already had in the form of barcode scanners.
Some merchants launched their own efforts rather than waiting for the payments industry to
sort itself out. Such an endeavor only made sense for merchants with massive scale, a high volume
of transactions, and expertise in developing consumer-focusing applications. One such merchant
was Starbucks, which launched its own QR-code payment system at stores in Seattle, San
Francisco, and New York City in 2011. Using its proprietary mobile application, customers were
able to activate a QR code to pay for products using their Starbucks Card accounts, which as of
July 2011 accounted for approximately 20 percent of Starbucks in-store transactions.21

18 Ben Parr, “PayPal Predicts the End of the Wallet by 2015,” Mashable, June 29, 2011, http://mashable.com/2011/06/29/paypal-100-
million.
19 “Who Will Win As Mobile Payments Go Mainstream?” Business Insider, February 13, 2013, http://www.bullfax.com/?q=node-whowill-win-mobile-payments-go-mainstream.
20 “What Is a QR Code?” http://www.qrcode.com/en/about (accessed October 7, 2013).
21 Jennifer Van Grove, “How Starbucks Is Paving the Way for Mainstream Mobile Payments,” Mashable, June 28, 2011,
http://mashable.com/2011/06/28/starbucks-mobile-pay-tech.
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Apple Pay and Android Pay
Launched in 2014, Apple Pay offered its users a more secure mobile payment option that
allowed them to use their Apple devices to pay with a tap at participating merchants. Users could
store their credit or debit card information in their iPhone (version 6 and up), iPad, or Apple Watch.
Apple itself did not store any credit card data and no credit card data was ever transmitted to or
stored on a merchant’s server. Instead, when a user signed up for Apple Pay, the card information
was immediately encrypted and securely sent to the relevant credit card network. Once the account
was verified, a token—a randomly generated, unique sixteen-digit number that acted as a reference
ticket—was sent back to the originating device and safely stored on the device. This token was
used in place of an actual credit card number when performing a transaction. Apple had also
committed not to collect any transaction data or keep any purchase history. As of late 2016, Apple
Pay worked with all leading U.S. banks as well as hundreds of smaller banks. Apple had also
accumulated a long list of participating merchants, including American Eagle, Dunkin’ Donuts,
Macy’s, McDonald’s, and Whole Foods.
In 2013 mobile network operators Verizon, AT&T, and T-Mobile launched the Softcard wallet,
which stored customer information on a special SIM card in mobile phones and was compatible
with many mobile phone brands, including Samsung, LG, Motorola, and Sony.22 In fact, many
Verizon phones actively blocked the use of the Google Wallet application.23 Softcard processed the
transactions of Visa, MasterCard, American Express, and Discover.24 Google acquired Softcard in
201525 and launched Android Pay, a digital wallet that was compatible with all Android phones and
had tie-ups with all major credit card networks.26
The History of Square
Founding
In 2009 a chance interaction between a seasoned Silicon Valley entrepreneur and his artist
friend was the genesis for a completely different approach to mobile payments. Born in St. Louis,
Missouri, and educated at New York University, Jack Dorsey first experienced entrepreneurial
success by co-founding Twitter with Biz Stone and Noah Glass.
While still the chairman of Twitter’s board of directors, Dorsey heard his friend James
McKelvey, a glass blower who sold high-end decorative glass faucets and home furnishings,
express frustration with his inability to accept credit cards. McKelvey and Dorsey began to

22 Ryan Kim, “Handset Makers Line Up Behind Isis NFC Payment Platform,” Gigaom, September 27, 2011, https://gigaom.com/2011/
09/27/handset-makers-line-up-behind-isis-nfc-payment-platform.
23 Dan Seifert, “Verizon Won’t Offer Google Wallet for the Galaxy Nexus Because It Uses a ‘Secure Element,’” The Verge, December
10, 2012, http://www.theverge.com/2012/12/10/3751538/verizon-google-wallet-galaxy-nexus-secure-element.
24 Mark Hachman, “Isis Carrier Venture Signs Payment Deals with Visa, Mastercard, Others,” PCMag India, July 20, 2011,
http://in.pcmag.com/smartphones/39383/news/isis-carrier-venture-signs-payment-deals-with-visa-mastercar.
25 Chris Welch, “Softcard Is Shutting Down on March 31st, and Google Wallet Will Replace It,” The Verge, March 5, 2015,
http://www.theverge.com/2015/3/5/8152801/softcard-shutting-down-march-31.
26 Ben Popper, “Google Introduces Android Pay, a Replacement for Its Wallet App on Mobile,” The Verge, May 28, 2015,
http://www.theverge.com/2015/5/28/8661867/google-introduces-android-pay-replace-wallet-app.
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brainstorm ways to make it easier for small, low-volume merchants to accept credit and debit cards
without paying exorbitant fees.27
Small merchants in the United States typically began accepting credit cards after they were
contacted by independent sales organizations offering to set them up in exchange for a monthly
fee, a gateway fee, and the cost of a card reader, which could run several hundred dollars. In
addition, the issuing card company would charge a percentage fee on every transaction; the fee
typically ranged from 1.79 percent to 4 percent. Approximately 70 percent of applications for
merchant processing accounts were either never completed (largely because of the cost of
purchasing a credit card reading terminal) or were rejected by the acquiring bank because of
insufficient transaction volumes or inadequate creditworthiness. As a result, the Federal Reserve
Bank of Philadelphia estimated that just 20 percent of the 30 million U.S. businesses with sales of
less than $100,000 accepted credit cards in 2009.
Within a month, Dorsey and McKelvey had built a prototype
device: a small square block, roughly the size of a quarter, containing
a magnetic stripe reader that plugged into Android and iOS mobile
devices through the headphone jack. Using the device (whose shape
gave the fledging company its name), a card could be swiped and a
credit or debit transaction securely processed anywhere using the
mobile device. After presenting the product at the 2009 Allen &
Company Sun Valley conference, Square raised a reported $10
million at a $45 million valuation, lofty even by the standards of the
day.28
Square acted as a payment aggregator, which is to say that it owned its own merchant account
and charged fees in exchange for allowing other businesses to accept credit card payments and bank
transfers on that account. Square’s value proposition offered two benefits to merchants. First, it
offered a more transparent fee structure and lower cost of entry. Square was effectively an acquiring
bank and had reached a sufficient scale of transactional volume that it could extract price
concessions from the card association. As a result, for any transaction processed with a Square
reader, merchants paid a flat $0.15 fee plus 2.75 percent of the transaction value, which eliminated
hidden fees. Perhaps more important, Square gave away its reader at no cost to anyone interested
in using it. Later, Apple Store, Best Buy, Target, and Walmart began selling readers for $9.95 that
included a $10 credit for the purchaser’s Square account.
Square used its Series A funding to finance a 50,000-user pilot program in January 2010. By
November, the pilot had proven so successful that the company was quickly able to raise an
additional $27.5 million in a Series B round led by Sequoia Ventures, at a $240 million valuation.
Square launched in November 2010 and soon was processing millions of dollars of credit card
transactions per week. In April 2012 Square received a strategic investment from Visa. (Square
declined to reveal the amount Visa invested.)

27 Noah Robischon, “Square Brings Credit Card Swiping to the Mobile Masses, Starting Today,” Fast Company, May 11, 2010,
http://www.fastcompany.com/1643271/square-brings-credit-card-swiping-mobile-masses-starting-today.
28 Michael Arrington, “Square Worth $40 Million Before Launch,” TechCrunch, December 1, 2009,
http://techcrunch.com/2009/12/01/square-worth-40-million-before-launch.
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Partnership with Starbucks
In August 2012 Starbucks abruptly reversed course on its own QR-code system and announced
a partnership with Square that enabled Starbucks customers to pay for in-store purchases with
Square’s payer application, Square Wallet. (Square Wallet offered functionality similar to PayPal’s
mobile payment application.) As part of the transaction, Starbucks invested $25 million in the
company and Starbucks chairman, president, and CEO Howard Schultz joined Square’s board of
directors. Square also took over processing for all of Starbucks’ U.S. credit and debit card
transactions, significantly expanding Square’s scale while potentially reducing Starbucks’ payment
processing costs.29
The partnership went live in November, a month after Square announced Square Directory, an
online directory of merchants that used Square to process credit card transactions or accepted
Square Wallet. Unlike Yelp or Foursquare, the directory offered no reviewing functionality, though
it did allow businesses to advertise coupons, discounts, and other special offers.30 Square Directory
offered social networking features that enabled users to tweet, e-mail, text, or post through
Facebook links to particular offers or merchants. It also helped users find the Starbucks closest to
them and discover new offers on Starbucks products.
In announcing the partnership, Schultz emphasized the companies’ shared commitment to build
the ideal consumer experience, an objective echoed by a member of Square’s communications
team:
Starbucks’ original goal [in launching its own QR-code system] was providing a better
customer experience. Coffee is their business; processing is not. And so we started working
with them on the back end, because we shared this common devotion to building the best
possible customer experience. Starbucks is the only coffee chain—maybe the only
business—in the world that does this; they ask you your name, call you by your name when
your purchase is ready, and actively try to remember your name for the duration of the
time that you’re in their store. It’s a tremendous reason for their success—their ability to
create a place where customers feel like a regular—and it lines up with Square’s total
focus on building the best customer experience in the world.31
In October 2015, while in the process of going public, Square revealed that although Starbucks
contributed 11 percent of Square’s total sales in 2015, it had accounted for 21 percent of the
company’s transaction costs. Specifically, Square reported that it had lost $71 million from
processing Starbucks payments over the past three years. The vast majority of Square’s transaction
costs came from fees paid to Visa, MasterCard, and other credit card companies. Square agreed to
end the exclusivity arrangement with Starbucks over the following twelve months.
“The terms of the agreement were unprofitable for us,” the company said in its IPO filing. “We
believe this agreement was a valuable catalyst for building best-in-class enterprise infrastructure

29 Claire Cain Miller, “Starbucks and Square to Team Up,” New York Times, August 8, 2012,
http://www.nytimes.com/2012/08/08/technology/starbucks-and-square-to-team-up.html.
30 Jordan Crook, “Square Launches a Merchant Directory To Help Customers Discover New Places,” TechCrunch, October 3, 2012,
http://techcrunch.com/2012/10/03/square-launches-a-merchant-directory-to-help-customers-discover-new-places.
31 Anonymous Square employee, in interview with the author, March 14, 2013.
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. . . This relationship helped us to achieve more significant scale and to build greater awareness
with prospective sellers.”32
Square’s IPO
Square went public on November 19, 2015. Square priced its initial offering at $9 a share,
which many analysts viewed as being well below the expected range of $11–13. Indeed, the stock
opened on its first day of trading at $11.20 and quickly rose to a high of $14.78, closing the first
day of trading at just over $13.
Since then, however, the stock had not performed well, as investors expressed their concerns
about Square’s growing losses and slowing revenue growth. Square’s stock price dropped below
its IPO price just weeks later, in January 2016 (see Exhibit 3).
The Future of Square
In late 2012 Square hit an annual processing run rate of $10 billion in transactional volume,
excluding Starbucks. Although its revenues were increasing (see Exhibit 4), it faced increased
competition from fast-follower competitors and an uncertain landscape (see Exhibit 5).33
Organic Growth
“There are still 26 million American small businesses that don’t accept credit cards,” one
Square employee noted in early 2013. “Obviously, there is plenty of room for organic growth.”34
The advantages to such a strategy were obvious—pursuing it would not require building new
products, but rather continuing the execution of a proven model. The more than sixfold increase of
sellers accepting Square Wallet (250,000 in 2012) offered hope for such a strategy.35 Square began
putting its enormous war chest to work in mid-2012 with television and online advertising targeted
at small businesses still not accepting credit and debit card payments.
However, the environment had changed with the entry of fast-follower startups such as iZettle
and new offerings such as Intuit’s GoPayment, which offered the same services as Square in Europe
and the United States, respectively. Square may already have captured early adopters, which meant
that ongoing organic growth might not be sustainable at its former rate.

32 Square, Inc., SEC Form S-1 Registration Statement, October 14, 2015.
33 Owen Thomas, “Square Is Now Processing $10 Billion a Year, Not Counting Starbucks,” Business Insider, November 14, 2012,
http://www.businessinsider.com/square-payments-10-billion-2012-11.
34 Anonymous Square employee, in interview with the author, Spring 2013.
35 Ken Yeung, “Square Ends 2012 Processing $10b Annually, 40k Retailers Onboard, Looks To Expand Globally in 2013,” The Next
Web, December 29, 2012, http://thenextweb.com/insider/2012/12/29/square-ends-2012-in-good-position-seeks-expansion-in-2013.
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International Expansion
After closing Square’s $200 million Series D round, Dorsey disclosed that at least a portion of
the proceeds would be earmarked to fund international development. However, just as Facebook
found that its success in the United States had spawned Facebook clones in several countries—
some of which it purchased, others of which it elected to challenge directly—Square found
established competitors in some overseas markets. Payleven and iZettle, for example, had both
been recognized by the UK Financial Services Authority as authorized payment institutions. Some
overseas competitors were even making plans to expand into Square’s home market in the United
States.
One potential obstacle to international expansion was differences in the popularity of
smartphone platforms. Square’s initial penetration in the United States occurred largely among
merchants who were iOS users, generally considered a more design-oriented, technologically savvy
segment. Many emerging markets, on the other hand, had much lower smartphone penetration
overall and much higher market share for Android phones.
Monetize Transactional Data
As Square’s transaction volume had grown, so too had the amount of transactional data it
possessed—as well as the potential value of that data. The company currently provided a handful
of basic analytical reports to merchants using its readers, with simple metrics such as average
transaction size, total customers, total transactional volume, and so on. “Right now we provide
three reports to each seller. They can compare days of the week, compare this year to last year,
track transactions by time of day . . . Right now we’re at an early stage, but the data is incredibly
useful and will be increasingly so, as we can eventually predict that on a rainy day, you sell more
scones with coffee, or whatever [the case may be].”36
Square Cash
In 2013 Square introduced Square Cash, which enabled peer-to-peer (P2P) money transfers via
e-mail or the Square Cash app. The basic Square Cash service was free, but it only worked with
debit cards—not with credit cards or bank accounts—and came with a limit of $2,500 a week.
Small businesses that wanted to process larger amounts could register for a business account and
pay a 2.75 percent fee for debit card or bank account transactions. Square Cash’s main competitors
were PayPal and Venmo, both of which offered a free P2P option for bank account transfers. PayPal
also offered a business account, which guaranteed customers a full refund if they were unhappy
with their purchase or did not receive the promised product/service. PayPal charged businesses a
2.9 percent plus $0.30 transaction fee for this service.
Venmo charged no fees for customers who used their Venmo balances, bank accounts, or debit
cards for P2P payments. Just like Square Cash, Venmo lost money on all transactions performed
with debit cards, as the companies had to pay the debit card’s relevant processing fees.

36 Anonymous Square employee, in interview with the author, March 14, 2013.
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Square Instant Deposits
A typical Square transaction was deposited at the merchant’s bank account within one to two
business days, depending on when the transaction was processed. In August 2015 Square
introduced Instant Deposit, which allowed merchants to move funds from their Square account to
their debit card account in a matter of minutes. Square charged a fee of 1 percent of the deposit
amount (that is, 1 percent of the amount after Square’s other fees were subtracted). Square required
that Instant Deposits be between $50 to 2,500, though a merchant could set up multiple Instant
Deposits. New merchants were limited to one Instant Deposit per day for up to $500; this limit
increased over time.
Square targeted its Instant Deposit service toward merchants with heavy weekend sales who
did not want to wait until Monday to get their cash and contractors who often needed a customer’s
initial payment to purchase supplies. According to Square, its risk-management capabilities gave it
the ability to offer this service. “We’re able to assess the riskiness of somebody in real time and
make a decision,” said Brian Grassadonia, who led the Square Cash team, which was responsible
for the Instant Deposit service.37
Square Capital
In 2014 Square launched Square Capital, a funding program for its merchants. Merchants’
eligibility for the funding was determined based on Square’s own data analysis. Square analyzed
its merchants’ payment processing information to understand how their businesses worked and to
gauge whether they were likely to pay Square back. Merchants who were offered funding through
Square Capital agreed to pay a percentage of their future credit and debit card sales back to Square
until the cash advance was fully repaid. Square’s “custody” of the credit and debit card payments
acted as pseudo-collateral and thus eliminated the need for actual collateral.
Square charged a one-time upfront fee that covered the processing fee and the interest on the
loan. It required that loans be fully repaid within eighteen months. A typical loan offer of $10,000,
for example, would look as follows:
x Amount deposited in merchant’s bank account: $10,000
x Total loan repayment due: $11,200
x Percentage of daily card sales diverted toward loan repayment: 11 percent
x Minimum amount due every 60 days: $622.22
Square Capital’s loans were issued by Utah-based Celtic Bank. Square sold blocks of its loans
to third-party investors for a fee.
In August 2016 Square announced that it would partner with Upserve, a startup that processed
card payments and provided business management tools to small restaurants, to offer the startup’s
merchants Square Capital loans.

37 Mike Dautner, “Square Offering Small Businesses Instant Deposit of Payments for a Fee,” Payment Week, August 13, 2015,
http://paymentweek.com/2015-8-13-square-offering-small-businesses-instant-deposit-of-payments-for-a-fee-8040.
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Exhibit 1: Processing Credit Card Payments
The credit card payment and settlement process in the United States was handled as follows:
A. A cardholder used a card to pay a merchant for a purchase made in person, online, or by
telephone.
B. The merchant submitted the credit payment electronically to the acquiring bank (or the
acquiring bank’s processor) for approval. The merchant had previously established a credit
card processing account with the acquiring bank.
C. The acquiring bank (or processor) used the appropriate card association’s network (e.g.,
BankNet for MasterCard, VisaNet for Visa) to request approval from the issuer, which
approved or declined the request based on the cardholder’s current balance and
creditworthiness. The purchase amount less interchange fee was transferred to the
acquiring bank.
D. The acquiring bank relayed the approval to the merchant, deducted additional fees, and
deposited the net amount in the merchant’s account.
E. The cardholder received a bill from the issuer and paid the amount due without interest
immediately or in multiple payments with interest over time.
Notes: Fees in this example are typical but not average. Dollar amounts, except network assessment fee, are from a similar flow chart in U.S.
Government Accountability Office, “Credit Cards: Rising Interchange Fees Have Increased Costs for Merchants, but Options for Reducing
Fees Pose Challenges,” Report GAO-10-45, November 19, 2009.
Source: Tim Mead, Renee Courtois Haltom, and Margaretta Blackwell, “The Role of Interchange Fees on Debit and Credit Card Transactions
in the Payments System,” Federal Reserve Bank of Richmond Economic Brief, May 2011.

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Exhibit 2: How PayPal Worked
Source: PayPal, “How PayPal Works,” https://www.paypal.com/au/cgi-bin/webscr?cmd=xpt/Marketing/general/NewConsumerWorks-outside
(accessed October 7, 2013).
Exhibit 3: Square’s Stock Price
Source: MSN Money.
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85%
51%
17%
57%
49%
44%
8%
3%
8%
3%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
PayPal Google Wallet MasterCard
PayPass
Square Wallet Apple Pay
Percentage Of Total Respondents Aware Of Product
Percentage Of Total Respondents Who Used Product
Exhibit 4: Square Revenues Over Time
Exhibit 5: Awareness and Usage of Mobile Payment Processing Systems
Source: Vantiv.com; YouGov.com. MasterCard PayPass numbers are for 2016. All other values are for 2015.
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