Twitter’s Dorsey: Fixing credit cards with Square. Health records next? by JP Mangalindan @FortuneMagazine October 4, 2010, 6:57 PM EST E-mail Tweet Facebook Google Plus Linkedin Share icons With Square, the entrepreneur wants to bypass middlemen and empower small merchants. But can he revolutionize an industry wedded to decades of status quo? Photo: Jemal Countess When Jack Dorsey’s friend, a glassmaker based in San Francisco, failed to sell one of his pieces on the street simply because he couldn’t accept credit cards, he saw an opportunity. They invented Square, Dorsey’s new company that transforms mobile device into a credit card readers, letting anyone accept a credit card and run a transactions in less than 10 seconds. As the Twitter creator still sees it, credit is in dire need of simplification, and Square is just the thing. Square bypasses the standard business setup for accepting cards– reader machines, merchant bank accounts and back office computers — entirely. Plug the plastic square-shaped dongle into an iPhone, iPad or Android device, and you’ve got a mobile credit card reader. For each transaction, the person processing the credit card is charged $0.15 and 2.75%, notably less than online credit service PayPal, which charges $0.30 and 2.9% for transactions up to $3,000. Competitive transaction fees, along with Square’s ease-of-use and Dorsey’s clout, explain why the ambitious startup raised more than $10 million in funding and reached a valuation of $40 million-plus before it even launched. As Square exits its pilot phase, we checked in with Dorsey to discuss the credit industry, recent criticisms of Square, competing startups like FaceCash, and his long-term plans. Fortune: When ever you talk to reporters, you usually demonstrate Square by using their credit cards. Exactly how much money have you made from these demos? Dorsey: At least $600. I give it all to charity:water, that charity in New York City, which helps build free water wells. It’s the best company demo ever I did. Twitter never got me any money! Credit cards have been available for decades. Why do you think it’s just now that services like Square are emerging? I think they’re coming to a [critical] mass. It really had to do with pre-paid cards. … These things are so popular that people that putting their entire paychecks on them or getting their checks deposited directly to a prepaid card, which they can then use everywhere. It’s pretty amazing. But the problem is that no one can accept these cards. It’s really hard to get a merchant account and it takes 3-4 weeks, and there are all these fees, so there’s this opening to turn on the other side of the network so that everyone — even your babysitter — can accept your card. So far what have you found to be the biggest group of people using Square? It’s surprising. We got a lot of traction from charities, political campaigns. Those two entities are always looking for donations. Being able to accept donations via credit card allows for more donations because people can immediately act on their instincts instead of going and digging up what ever payment devices that this charity accepts. We’ve also gotten a lot of traction with bands, who are selling their merchandise like CDs and t-shirts in the back. Really, it’s been all over the place, from individuals doing garage sales in their backyard to larger retailers. There’s a clothing retailer in New York City called Self Edge which sells $400 jeans via iPod touches in the store, where they can actually go to the point of decision and not make people line up behind the cash register. You’ve been using analytics to keep tabs on transactions. What have you learned through the software? We have one entity in New York, a little hot dog truck. They’ve increased their sales by about 20% because they can now accept this form of payment. It’s interesting until you think about the fact that not many people carry much cash with them anymore. So encouraging people not to have to go to the ATM to draw down on some cash but be able to pay immediately to get their hot dog just results in less lost sales. What about the sales them selves? Have they been surprising? We’ve seen that people were selling their cappuccinos for $3 or $3.50, $2.50. We’ve determined via the people using Square that the average price of a cappuccino is about $2.77. There’s a lot of data around the items that people are selling and how fast those things are moving, like how they’re being priced in different markets, and that’s very interesting from a merchant perspective because if you take that same data, you can figure out how many times you sell cappuccinos to those repeat customers, or when people buy those cappuccinos, do they also buy say, biscotti? It gives all this information to the small businesses, not just Starbucks. So while analytics allows you to study general trends, does the software also let the merchant study them, too? It will allow both. Right now, it’s more focused on the individual business and just how they can make decisions for their business around what they’re doing. We can aggregate that data into something that really works for everyone, and we can use aggregate data to determine that people are paying $2.70 in Portland and Seattle, so maybe a merchant can decide to price around there or a little lower. What lessons have you learned from Twitter that helped you when developing Square? At Twitter, we didn’t have a lot of internal analytics into what the system was actually doing and what the users were doing, so we were kind of flying blind. That’s something we built right away here at Square, an amazing dashboard to show everything that’s happening in the system. We can use that data not just to make decisions around the product, but we can also use it to minimize our risk and our fraud and just build products for our users using that same data. The other thing I learned from Twitter is how important internal and external communication is when you’re building. People just want to know what’s going on, and if they know what’s going on, they feel comfortable waiting or being patient or understanding why a price has changed or a cost has changed. That’s one of the biggest things that Square is solving in the credit card industry. You have no idea what’s going on. You have no idea how much you’re paying, you don’t know why you’re paying, you don’t know who you’re paying. Just bringing that level of transparency to everything we do internally and externally has really helped a lot. You said recently that you’re pacing out the rollout of Square. Could you elaborate on what you meant? We don’t want to release too much, too fast. We want to pace every part so that customers have a good experience because unlike Twitter where we did kind of release everything at once and just went with it, if we go down, if we’re unavailable, if we have a major error in the code, we don’t lose 140, characters, we lose someone’s sale. We impact someone else’s business. We potentially put the payer in a weird, awkward social situation that looks like their card has been declined. We can’t afford any of that. Recently, customers complained that the $100 transaction limit was too low. How are you addressing those concerns? In order to minimize our risk or fraud potential, what we did was we put these limits on how much we could take from someone. We learned very quickly that not only were our limits too low, but limits in general were just a bad idea. So what we did is we took another two months, we went back to the drawing board and we figured out how to make it so that there were no limits in how much you could take, and that’s exactly what did. So now we’re in a position where you can take money with Square and not be limited at all in how much you take. So if you want to take a hundred dollars, you can do that. If you want to take $10,000 off a card, you can do that. There’s been some criticism from credit industry insiders that it was naive for someone outside the industry to come and try to do away with the old process. What would you say to that? I think that is true. It’s not a world that I really understand. Something about any great entrepreneur or any great company is being able to fill the holes of your knowledge and your experience, and all that means is getting a good team around you. So we have one advisor who was at PayPal for seven years, one advisor who’s been in payments for over 15 years, and another advisor who was on the board of governors at the Federal Reserve. We just hired a general manager to help run the company who was the right-hand man at PayPal and was the one who went to D.C. to talk about the policies that PayPal was facing and helped ease some of those so that could do something interesting for consumers. I think to be honest, the industry needs some more new folks to this world. They need some redefinition. They need a fresh perspective on this because there are a lot of people who are not able they’ve been frustrated or they don’t know how to start. Aaron McPherson, an IDC Financial Insights analyst, has said eliminating a merchant account, as Square does, is akin to dangling fresh meat for criminals. What would you say to that? Only if you don’t have information! It doesn’t really take into perspective all the information that we have today. Every device that Square works in has location information, so we can tell if a $500 transaction is happening in the middle of Washington Square Park at 2 a.m. That’s a transaction that we probably want to flag. We have people who are putting up their Twitter accounts. We have people who are putting up their Facebook accounts, and we can get information about not only who they are, but also what other people think of them, and how other people interact with them. So there’s a lot of information we can use to make sure and to have a better understanding that these people are not fraudulent and that they do not intend to be fraudulent or to incur any kind of negative behavior in the system. That’s really all we need to do know. What do you think of other, newer credit startups like FaceCash? There’s plenty of room for competition. There’s plenty that needs to happen in this world. There’s a lot we can do, and I love meeting with other payment companies because everyone’s going after the world in a slightly different way. There’s this growing trends of credit payment startups that do away with the card. Do you envision a day when Square won’t be reliant on credit cards, where Square won’t need that dongle anymore? I don’t know. Square wants to be payment device agnostic, and credit cards are the way to pay today. That’s what we’re building this system for. Everyone knows how to use a card. When someone sees a plastic card, they know exactly what it is, and they know how to swipe it and they know what to expect. So any other sort of behavior that comes out of it or any sort of payment mechanism that comes out of that is something we also want to support, and maybe it’s something that we help define. But would you like to see a day where there are no more credit cards? I would love to see less plastic in the world, generally. Just less objects in the world. I’m more of a minimalist, so I would definitely seek to move as much as we can to software. Social media like Facebook and Twitter have innovated and brought a new form of transparency. But do you think they’ve also introduced new problems to society? I haven’t seen any. I think one has to be careful in their message and be considerate. But I think transparency helps to inspire that. The more transparency you have, the more self-awareness you have. The more more organization awareness you have. It’s something you can get better and better at. I think that’s what people have to work on as well. There’s a way to evolve this to something that really works for everyone. We’re seeing more and more big corporations trying their hand at social media with dedicated Twitter feeds. Do you think they’re using Twitter effectively? Yeah, I think they’re using it more effectively than when they first started, but we were actually surprised by the ways people were using it early on. We thought big companies and enterprises would use it for promotion — that was a no-brainer — but we had no idea that the Comcasts of the world would use it for customer service and used it for market research and used it to determine the sentiment around the brand. So those were very surprising to us: very effective for the brand and very effective for the technology as well and also for their customers. Last July, you invested in Mike McCue’s Flipboard project. What do you see as the potential in that? Flipboard inspired me right away because I think the biggest thing missing in Twitter right now and the biggest challenge we have is to allow for more discovery of content. Flipboard was interesting to me because it took a medium that was well understood by our culture which is a magazine and put in a medium which was not understood, which is Twitter. I think Twitter is still not massively or evenly understood by part of this culture. What would you like to do after Square? Health is one of the most precious things we have as humans, but I also think it’s the least understood. It’s a black box to most people. I think the most important thing is just having ownership around data, ownership of over our health records, and being able to transmit that to other entities and other doctors and share it. But being able to annotate itself. More approachable easy ownership over our own health data so we can understand our health. The second biggest thing is more around preventative medicine or preventative health: encouraging people to move around, encouraging people to walk, to be active and to be able to track it. I think that’s the biggest thing is that once you give people that data and make it easy to understand. It seems like some areas of healthcare are already moving in that direction. I think Nike is doing some interesting things with pedometers into the nano. There’s a company called Fitbit which is also doing something very similar. It’s just a very simple pedometer — to have 10,000 steps a day and this is what it equals. Just a very, very basic goal. To have these gorgeous graphs and to see that momentum. People can see their momentum, then they really have something. They can improve their health themselves. That’s the biggest thing, not to rely on the health care industry but to have a better understanding of their own health and to be able to change it.