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Square Scales By Sharing A Cut Of Small Business Revenues

Posted on Monday, Aug 1st 2011

While services like Google Wallet are focused on helping consumers use their smart phones to make payments, there is another big player who has created a smart tool focused on the needs of businesses. Founded in 2009 by Twitter co-founder, Jack Dorsey and James McKelvey, Square was initially founded to provide a solution, especially for small business owners, to accept credit card payments through their mobile phones.

Square’s Financials
The San Francisco–based electronic payment service was initially created to help SMBs with an economical solution for accepting card payments. Square launched their pocket-sized card reader in early 2010 and by November last year, was already featured among Time Magazine’s 50 best inventions of 2010. The plastic square-shaped reader is connected to the audio jack of a smart-phone to let users accept payments through the phone and directly deposits the amount in their bank account the subsequent day. Currently, the device is powered through apps available for Android and iOS devices.

As of now, the service is available only in the U.S. Square does not make money through the device or the app, both of which are available free. Instead, they earn revenue by charging 2.75% of the transaction volume and a $0.15 processing fee for all cards swiped through their device. For card details entered manually, Square charges 3.5% and the additional $0.15 as a transaction fee.

According to market estimates, Square has shipped out more than 500,000 credit card readers and processes more than a million transactions a month and worth more than $4 million a day. They are expected to have processed $66 million worth of transactions in the first quarter alone and are projecting transactions of more than $1 billion by the end of the year. Given their processing fees, the volume of business translates to revenues of at least $27 million a year. Last month, they announced plans to raise $100 million in funding led by venture capitalist firm Kleiner Perkins. The funding pegs their valuation at over $1 billion. Analysts at TechCrunch have put Square’s valuation at over $2 billion.

Square’s iOS Focus
Square is also moving beyond processing of card payments. They recently launched two iPad apps, Card Case and Register, that help replace cash registers at the stores, by enabling easier check-out and additional features. The app displays smart receipts, which can be signed by the customers on the screen and sent to them via e-mail or text message and also lets the business connect with customers by letting them publish their menus and share daily specials. The business owner can also analyze the business’s performance during the day by downloading sales patterns and inventory details.

It isn’t surprising then that players like Apple have recognized Square’s importance in the market. Apple is marketing Square in their stores and has also launched how-to podcasts for iPad users.

Today, a billion-dollar valuation isn’t really news. But, whereas most new age companies don’t even have revenue streams, Square’s strong revenue stream and market potential makes one appreciate its value. According to Forbes, within the U.S., small shops are where an estimated 93% of all commerce still takes place, and Square seems to be focusing on that lucrative market. And, as I have pointed out before, they are sharing in the revenues of that market.

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It's all about recurring revenue. Although the cost per card reader will not add much to the overall profit of the company, it's those very small incremental purchase commissions that make the real money. Great article, very thorough and good references.

Welding Classes Monday, August 1, 2011 at 6:49 PM PT