One of the most common questions I get as a payment services professional is, “What do you think of Square?”. I often express my respect for them as they have helped millions of micro-merchants enable mobile payments, and access funding while they’ve built their business.
What I appreciate about Square and their CEO Jack Dorsey, is they started in 2009 to solve a problem. Jack’s friend, Jim McKelvey, missed out on a $2,000 sale of his glass faucets he was trying to sell because he didn’t have a way to accept credit cards, inspiring them to come up with a way to help others with the same problem.
If You’re Wondering Where Square Is Headed, I’ll Tell You.
I believe the financial industry is undergoing a tremendous makeover with the convergence of lending, payments, point of sale, marketing, accounting systems, and banking and I think Square helped open the door to the idea of a payments provider owning 100% of the services provided to a merchant.
As a result of merchants being open to this scenario, we’ve seen more POS systems begin to follow Square’s lead on owning more of the merchant relationship. Point of Sale systems like Toast, Clover, and Cake, which all launched after Square, all require you to process on their payments platform.
This is just the beginning and it won’t end with payments. Let me explain why.
Remember The Automobile Industry?
When the automobile industry took root in the 1890s in America, there were hundreds of car manufacturers and by 1930 the market in America was dominated by 3 manufacturers: Ford, General Motors, and Chrysler. The others completely went out of business.
Do you remember the Austin Automobile? Probably not. It was a manufacturer in Michigan from 1901-1921 and they manufactured a 1,000 units before closing their doors.
The same will happen in 10 years when someone asks a new restaurant owner if they’ve ever heard of First Data, Heartland, or TSYS. They will not have ever been heard of due to the need of legacy providers to consolidate in order to compete with new entrants like Square and Stripe.
Where It’s Going.
With financial institutions beginning to understand the threat that new providers like Square and Stripe bring to the market, along with other technology initiatives like Blockchain, Artificial Intelligence, and IoT, payments providers are consolidating, and banks, like Bank of America, are rethinking their payments future.
These financial institutions will stop at nothing to compete for the control of cash flow, even if it means acquiring every relevant solution that touches the merchant. Major processing platforms like First Data, Heartland, TSYS, Vantiv, and WorldPay have all been acquired in the last 3 years. Point of Sale systems, such as Micros, MobileBytes, Dinerware, Digital Dining, Restaurant Manager, and Future POS, have all been acquired by a payments processor over the past 3 years.
These purchases were primarily about purchasing an active merchant base while these organizations attempt to build new technology that will move them into the future. The existing technology is useless especially when it comes to achieving the outcome that the current market demands; technology that communicates across all departments of an organization while giving merchants access to the data they need to be successful.
The Future Big 3.
The future in every industry segment will, in my prediction, have 3 major providers that provide integrated business platforms that will serve as the primary platform merchants run their business from. It is not far fetched to foresee financial institutions like Bank of America building their own payment platforms and acquiring major point of sale, accounting, marketing, payroll, and software platforms to directly serve their customers.
FIS, Fiserv, and Global Payments, the institutions responsible for much of the industry consolidation, will also join them in this endeavor to deliver feature-rich solutions to the markets they want to serve and it won’t be a single solution. The future will require these organizations to deploy multiple integrated platform solutions for each segment they serve with support teams that cater to that specific niche.
Square will be met with much competition now that it has realized that micro-merchants aren’t profitable and has started to move upmarket. For Square to succeed as one of the future Big 3 providers in any market segment, much of what has made them attractive to micro-merchants will disappear.
What Got Square Here, Won’t Get Them There.
Many industry experts have been following Square’s development and have been wondering if they will decide to become a bank. If they do, this will likely drive additional changes in the financial sector that will involve major banks and payment processors. As the convergence continues and these providers fight over merchants, Square will have to change at least 3 things:
- Flat-rate payments will come to an end.
Square has learned that flat rate payment processing at 2.75% is a bad deal for them. Coffee shops and food trucks where the average ticket is less than $10 love this pricing because traditionally interchange costs are often 3% before the payment processor adds their markup. Square lost several million dollars doing business with Starbucks and likely won’t continue this program due to its drag on their profitability. This is why their new pricing models included a transaction fee when they launched their advanced POS and terminal offerings.
- Software costs will increase.
Square has been patient while building their platform and in order to fund future development and deliver the returns that every public company must deliver to its shareholders, they must increase profitability. This will require them to attract and retain the best talent; this investment will require significant ongoing capital. This investment will not only be made in the area of leadership and software development, but also in regards to expanding their existing support staff.
Restrictive agreements will likely be implemented or banished, industry-wide.
As the payments industry continues to consolidate to build new platforms that provide the experience, integrations, and features merchants want, the agreements that merchants have grown to hate, will be implemented to protect their investment. This is just an opinion, but the fact is Square has built a stable business because they offered a pretty safe and reliable service to merchants that major processors didn’t want to serve. Serving the same merchants that large financial institutions want to serve, will require Square to play hardball and this will likely include long-term contracts, or the rest of the industry will eliminate contracts entirely.
- Specialization in key industries.
Serving an unsophisticated merchant base hasn’t required Square to develop a deeply sophisticated feature-set. This may be why small restaurants and retailers were the first markets they developed a POS offering for. Square will likely, after building deep integrations and features in this space, develop the features needed in-house or acquire other business platform assets that they can integrate their payments to serve key markets. The key thing to understand is, building a platform from scratch with deep features for a specific industry takes serious commitment and capital. Plenty of POS companies had plenty of capital behind them and turned out to be very challenging in many respects, remember Micros?
Who Will It Be?
Square, Stripe, FIS, Global, Fiserv, and other financial institutions will be jockeying for position in the industries they want to serve. The key thing to understand is, being a payments platform that does everything for all merchants won’t make them one of the 3 major providers in a specific segment, each provider will have to dedicate significant time, teams, and capital to building and developing first-class solutions for the market they want to serve. It will be through specialization, not generalization. The few specialized solutions will own 80% of the market, while dozens of generalized solutions will serve the remaining 20% of the market.
You might be asking yourself, “What does the future look like for my business software provider”? I think there will continue to be tremendous growth in the ISV space with many major players being acquired by the financial institutions that own the banking, payments, and technology relationships. With ISV’s wanting more payments revenue and payments providers needing something other than merchant processing, this is inevitable. ISV’s will be wholly owned subsidiaries of financial institutions purchased for their IP and industry-specific tools and knowledge. Instead of ISV’s partnering with PayFacs like WePay, Stripe, or ProPay, they will be owned by the parent company of these solutions.
The challenge merchants face at this point in time, is determining which industry provider they are willing to partner with long-term to help them compete in their respective industry. Purchasing what appears to be an okay solution today, won’t be enough as customers require a dynamic purchasing experience from businesses they do business with. Having the right technology, support, and partners will be key for businesses, and the business platform they select will be key in assisting their differentiation in the marketplace.
In 5 years, I believe Square will be one of the “Big 3” business platforms serving a specific niche industry or they will serve the remaining 20% of merchants that don’t demand deep industry-specific features and I believe the same about Stripe, PayPal, Global, FIS, and Fiserv.
How Should You Approach Your Technology?
As a business owner that is in the process of determining which systems you will use to take your business into the future, it’s important for you to keep a pulse on where technology is going as it will likely impact your ability to attract and retain the right employees and customers. It can also help you navigate the technology decisions you will need to make in the coming future, whether that be for point-of-sale, payment processing, marketing, or even accounting.
Knowing the right questions to ask will be key to ensuring your business thrives as our market continues to change. Having a partner like the Northwest Advisory Group, will also be to your advantage as you make these tough decisions and enter into agreements with newly formed business technology platforms. If you are wondering what platforms are likely to be good for your business, we’d love to start the conversation with you.
