In five short years, San Francisco-based Square has evolved from a mere utility for cab drivers into a legitimate player in payments. While still focused on its core revenue-generating mobile point-of-sale (mPOS) solution, the company has also expanded into proximity (in-store) pay and, more recently, person-to-person (P2P) pay. And though such horizontal strategy should drive brand exposure, Square will need to approach its new markets with a ‘niche mentality’, just as it has done in mPOS.
Rather than pushing its point-of-sale (POS) hardware on big-name retailers like 7-Eleven, Square has targeted small and midsized businesses (SMBs) that need quick and inexpensive means for accepting card payments. The company has achieved impressive growth in mPOS despite sticking mostly to a niche market of taxi cab drivers, freelancers and contractors. To further its reach with merchants, Square launched Square Stand in 2013, which closer resembles traditional POS hardware and appeals to yet a different merchant segment: professional services firms like physicians and salons.
While Square continues to grow its mPOS footprint it has also taken interest in proximity payments. Its Square Wallet mobile app gives consumers, rather than merchants, the ability to transact with a mobile device at the physical point-of-sale. Using Square Wallet, consumers scan a QR code from their smartphone to pay for goods and services at checkout. The company’s first major partnership was struck with Starbucks in August 2012, a move that seemingly contradicts its niche strategy.
While it’s difficult to make a case for why the Starbucks partnership is anything but positive for Square, Jack Dorsey and team were surely aware of what their app was up against from the get-go. It just so happens that the Starbucks app has been the most adopted mobile wallet on the market to-date, accounting for nearly 14% of in-store transactions. With embedded loyalty features, music downloads and barista-tipping capabilities, the app easily trumps Square Wallet (so long as consumers are willing to make room for the app on their smartphone and take the time to set up an account).
In reality, consumers that visit a specific merchant regularly are likely to make room for the store’s mobile app if it provides unique benefits, such as loyalty points and coupons. We could easily see Starbucks-like results with the California-piloted Subway mobile wallet and, to a different extent, MCX. Consider consumers’ willingness to carry extra plastic with the Target REDcard so that they can earn cashback on store purchases. A similar phenomenon is primed to occur in mobile payments as store-branded wallet apps for big-name retailers and QSRs prove superior to those of third parties on the basis of loyalty and other store-specific features.
To reel in brand-agnostic consumers, Square may offer ancillary features like auto check-in, pre-order and appointment scheduling. More importantly, Square can maintain its niche strategy by targeting smaller, local merchants. Outside of its partnership with Starbucks, Square has sought merchant partners that lack wide-scale presence and capital for developing proprietary mobile apps and sophisticated loyalty programs, like Argo Tea.
It would be premature to speculate on Square’s exact niche strategy in P2P pay as its Square Cash solution launched only six months ago and is still largely unknown to consumers. However, I expect Square to identify a niche in the wide spectrum of P2P use cases (i.e. peer reimbursement, recreation, informal services, family fund transfer).
By following this niche strategy, Square foregoes the opportunity of being the ubiquitous solution in its payments markets, the way PayPal has tried to do with online pay and the way Popmoney and ClearXchange are struggling to do with P2P pay. However, given the sheer complexity and size of the payments market (retail payments in particular), Square just might have the right idea.