by Quang Truong


Square is a San Francisco based startup founded in 2010 by Jack Dorsey, founder of Twitter. Square enables merchants – typically small businesses and individual contractors – to collect payments by credit card without having to invest in expensive and immobile point of sale terminals. They accomplish this by distributing small credit card readers that can be attached to smart phones, allowing anyone with a square account to collect payments by credit card. Today, Square has over 400 employees, 250,000 vendor-users, and a $3.75 billion valuation.

CEME Square Infographic

CEME Presents: Square, part of the ABCs of Payments Series



Square offers free credit card readers to any merchant who requests one.Once a merchant has the credit card reader, a smart phone with the Square app and an account, they can begin receiving payments through credit card. Square generates revenue in one of two ways. The typical method is to charge a 2.75% fee on each credit card transaction. Another option is the merchant can pay a flat fee of $275 per month to receive free credit card swipes for the first $250,000 of transactions. If the merchant goes above this amount in a year, they will be charged 2.75% thereafter. Square can also process manually-entered credit cards at the rate of 3.5% + $.15 per transaction. On the cost side, Square must pay interchange fees for the credit cards used in the transaction. Since the average interchange fee for American credit cards is between 1.79% and 1.95%, Square keeps the remaining .8% of transactions leading to a net revenue of approximately $64 million last year. 


Square is an attractive innovation for small business owners for several reasons. First, expands the types of payments a merchant is able to accept. Next, sign up is simple and the device is free for merchants, minimizing startup costs. Lastly, the fact that the device is small and transportable allows highly mobile businesses like food trucks to operate more easily.  Square has also been used by non-profits to get donations.

Square is helpful for consumers too, primarily because it allows them to pay with credit card at more outlets without requiring any sort of change on their part. Recently, Square has taken a bigger focus on developing consumer end products, such as their Square Wallet (formerly Pay with Square). Square Wallet is an app that allows consumers to see what merchants nearby use Square. Consumers who have linked their credit cards can then pay these merchants through the app directly, potentially receiving discounts. Square Wallet hopes to eventually allow consumers to pay “hands-free”, by simply having their smart phones nearby (in their pocket or purse, for example) with the app activated; they simply pay by saying their name to the cashier, who then checks a picture of them and deducts payment automatically.


In terms of technology, the Square register is a simply a magnetic card reader that communicates credit card information to a smartphone through the 3.5mm audio jack.Merchants can also attach the same hardware to an iPad, along with installing a specific iPad app, to unlock a few more features.Once the credit card information is in the received, Square routes the information to Paymentech, where it is then re-routed to the credit card companies and the customer’s issuing bank. JP Morgan Chase is Square’s acquiring bank. Credit card information is never stored by the merchant’s phone for security reasons. Square currently accepts any card with a Visa, MasterCard, American Express or Discover logo; the company has also started a “Square gift certificate” which will be accepted by the device. Square also allows licensed healthcare providers and pharmacies to accept HSA cards.

 Merchant’s Square accounts are linked to their bank accounts and deposits are made daily. Merchants are still responsible for chargebacks (their bank account debited if a chargeback claim is started) though Square promises to help merchants with chargeback claims. Square uses a daily discounting method, meaning that interchange fees are deducted from merchant’s accounts prior to deposit, rather than bundled up and charged once a month; this decreases the cash flow going to the merchant.


As of September 2012, the company was valued at $3.25 billion.


Square’s biggest weakness is the lack of intellectual property privileges for their device. Already, companies like PayPal, Intuit and Verifone have created their own versions of the card reader. Eventbrite and Groupon may also be attempting card readers soon. Another issue is security concerns for the device itself. Verifone has alleged that it would be possible to steal credit card information from customers. For instance, a hacker could backwards engineer the Square App and then steal information each time a person swipes their card. Square has encountered further criticism from merchants for its fund holding policy. Lastly, Square might face some challenges in the horizon if consumers decide to switch to EMV or NFC cards. The great innovation of Square is that it lets anyone accept credit cards. If traditional credit cards are phased out for swipe-less payment methods, the company will have to adapt its hardware to suit this. 

#2 in the Series ABCs of Payments. The ABCs of Payments will examine a new company or innovation in mobile payments each week.
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One Response to Square

  1. Temitayo says:

    How are we sure the reader being very portable cannot be read by third parties or hacked by nefarious elements which may lead to theft of identity by the hackers?
    I am not saying this is not good but their must be a very good guarantee of one”s card details and personal information. the tech world is weird and one must exercise extra caution when using credit cards anywhere.

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