Four years ago, when its little card reader attachments for phones and tablets began to show up in cabs and at farmers’ markets, Square was one of the coolest, most innovative companies in Silicon Valley. Building an infrastructure of card readers from scratch was a challenge—especially through small-business owners and word-of-mouth. Still, for people who couldn’t use checkout counters for their customer transactions, Square offered unparalleled convenience. That’s over.
Today there are more than 80 companies, including PayPal and Amazon.com (AMZN), offering card readers that look a lot like Square’s, often for less and with more features. In August, Amazon introduced Local Register, a similar service that offered merchants a 36 percent discount over Square swipes until 2016 if they signed up by Halloween. (The company wouldn’t say how many have signed up.) In the market it pioneered, Square looks “a little long in the tooth,” says Nick Holland, an analyst at Javelin Strategy & Research. Even among its core market, businesses with $100,000 to $1 million in annual sales, the company’s share stands at 10 percent, according to Javelin data.
Square says all its sellers combined would make up the 13th-largest U.S. retailer. (That includes its payment processing business, which Starbucks (SBUX) uses.) “We are continuing to grow and working with bigger merchants,” says spokeswoman Khobi Brooklyn. “We continue to build out our offerings.” Gil Luria, an analyst at researcher Wedbush Securities, estimates Square lost $100 million last year while generating $300 million in merchant fees. Square wouldn’t disclose revenue or total users.
Part of its problem is that the small-business setup Square pioneered is becoming less profitable now that there are close to 100 card reader makers. The big money doesn’t lie in farmers’ markets, but with retailers, almost half of which plan to add tablets or other mobile payment devices to their stores by the end of 2015, according to a survey by Boston Retail Partners, a management consultant. By 2016, sales on such devices will exceed sales on traditional checkout terminals, estimates researcher Smart Insights.
Square’s Register app, through which merchants can track inventory, receive online orders, and send digital receipts, is its main offering for larger businesses. But the app, released in 2011, has been outmatched by rival programs tailored to particular industries. While Square has been trying to adapt, apps from companies such as Brink Software, Revel Systems, and ShopKeep have become the standards for quick-service restaurants, wine bars, and small convenience stores. “Square’s functionality didn’t come close to what we needed,” says John Lapeyrouse, a vice president at Smoothie King, which is starting to set up Revel in its 570 U.S. stores. Unlike Square, which does its own payment processing, companies including Revel let merchants shop for lower swipe fees. Groupon (GRPN) and payment processor First Data have also leapt into the market in the last few months, joining traditional card reader makers such as Ingenico (ING:FP), VeriFone Systems (PAY), and NCR (NCR).
By next October, U.S. merchants are scheduled to switch to checkout terminals that can accept cards using chips instead of magnetic stripes. That poses two problems for Square’s core card reader business. First, the chip reading technology is more expensive, and while Square gives away its current model of card readers, the company says it’ll have to charge for the new ones. (Wedbush’s Luria estimates they’ll cost $25 to $50 each.) Second, many of the new checkout counters will accept services such as Apple Pay that remove card swiping from the transaction. Apple Pay’s partner, Stripe, lets people bypass Square and other card readers by paying through an app. Square will have to add another chip to its hardware to accept Apple Pay. “The acceptance of plastic cards is by its very nature archaic,” says analyst Holland.
“We think it’s great to see Apple (AAPL) provide buyers more ways to pay and sellers more ways to get paid. Square will be there to help them accept it,” Brooklyn says. Square has hardly given up, signing Whole Foods Market (WFM), Godiva, and Uniqlo as some of its latest users. Dan Buck, creative director of 233-store coffee chain Dutch Brothers, praises Square’s “forward thinking” and customer service. In October, Square announced a $150 million funding round, led by the government of Singapore, that valued the company at about $6 billion.
“It was probably well needed,” says Holland. Even if Square can stabilize its business model, its long-anticipated initial public offering now seems doubtful. “It is more likely that Square will try to sell [itself] to Apple or Google (GOOG) based on the value of their install base,” says Luria. “That is likely to be at a significant discount to their private-company valuation.”
