After establishing a local presence about a year ago in Melbourne, Square have finally made it through local regulatory hurdles and launched their Square Reader in Australia, specifically targeting small businesses.
Of course most of us are familiar with the Square story. From payments upstart to fintech darling, a question mark still remains on whether it can build a sustainable and profitable business. One thing however is absolutely certain – Square is growing rapidly. Analysts expect Square, who reports its Q4 earnings today to announce revenue growth of 37% compared to the same period in 2014, taking the business from $250.9 million in sales to $343.2 million.
So what does the Australian market place hold for Square? Where can it win, where will it struggle? Below I present three key market dynamics that are important to consider when evaluating the Square strategy down under.
High contactless card penetration
Australians have a love affair with contactless cards. Currently the Square Reader doesn’t support tap and go transactions and this could be a hurdle. Why? Well, according to one of Australia’s largest supermarket retailers, and second largest payments player, Woolworths, more than 80 per cent of customers are using contactless technology at their checkouts – a good barometer for the rest of the retail card present sector. Woolworths estimate this saves a customer up to 6 seconds on each transaction. While time constraints might not be a game changer for a market stall holder looking at implementing Square, quick service venues like cafes and busy retailers will be hard pressed to look past the efficiency contactless transactions offer them. The good news? Some card payments under $35 won’t require a PIN at all, so this could go some way to alleviating the lack of contactless functionality, for now.
Complex credit card and debit card pricing
Here is where Square has the potential to blow the point-of-sale and payments sector out of the water. To begin with, Merchant Service Fees charged by banks for card payments are confusing. Most merchants could find themselves on either a flat fee, a normalized interchange plus an acquiring fee, a wholesale interchange plus an acquiring fee, plus a crazy number of variants in between.
On top of this, banks rarely attempt to make it easy for merchants to understand their monthly statements or opaque pricing structures. By making pricing straightforward and bundling the cost of the point-of-sale into the monthly fee of 1.9%, not only is it harder to do a straightforward comparison to the bank, but it makes managing overheads simpler and less variable month to month for the business owner.
Like minded competitors
Square has competitors in the local market who have already had time to gain traction. They are arguably also more flexible than the Square Reader, given they are open to integrating with other point-of-sale vendors. The two most well-known fintech payment disruptors are PayPal Here and Mint Payments. So far PayPal has integrated its card reader with Vend, one of Square’s key global competitors. Mint’s most publicised tie-up is with Xero’s main competitor, MYOB, via its cloud accounting product AccountRight.
It’s really a question of whether Square thinks it can be everything to everyone, or if integrating best-of-breed platforms is the better play. The jury is still out on that front. On the incumbent banking front, Australia’s largest bank, Commonwealth Bank has also been no tech-laggard. Its Albert EFTPOS tablet also presents a compelling all-in-one point-of-sale and payments solution, with an AppBank designed to let merchants customize their desktop experience.
The Square solution is a compelling suite of products for a sub-sector of Australian merchants, especially those starting up or who require a fully mobile solution. Using this product suite to disrupt the incumbent credit card processing market will be more difficult, and is probably not Square’s end game in the Australian market, yet. Given technology moves faster and faster, investing in hardware rather than software can become a lag on a business model, especially given the time it takes for new payment terminals to become compliant. Square however, unlike the incumbents, is well positioned for the new wave of mobile payments, where card readers are obsolete. This will be the play to watch in the next few years.