The latest issue of Wired has an interview with Twitter co-founder Jack Dorsey on his latest venture – Square. If you’re not familiar with Square, it’s a simple way for merchants to accept credit card payments through a little device that plugs into their phone.
Square has now shipped a half million card readers and is already processing over $3 million a day in transactions; it’s growing like wildfire.
The Square business model represents a big disruption to today’s payment processing market and could be an important stimulus to local economies. But that’s not why I’m highlighting them. These guys are rolling out features that look like an even more revolutionary shift in commerce called “Vendor Relationship Management.” But that’s not what Square is actually doing, and it’s worth understanding how a choice of business model can get in the way of building really disruptive, good-for-the world services.
How it Works
As a merchant, when you set up an account with Square, you get you a cool little credit card reader that plugs into the jack of your iPhone, iPad or Android phone. It also gets you an app for managing your purchase transactions.
How This Changes Things
Square is applying the Clayton Christensen disruptive innovation model to the market for payment processing. Start simple, penetrate the low end of the market and then use volume (and network effects) to work your way up-market.
Many of Square’s early adopters are really small-scale, local merchants who now operate in the cash economy. Yes, many of these folks currently work in black or gray markets (which will be a problem for Square), but there are also millions of people who sell stuff at local farmers market and street fairs, and millions of small-time landscapers and carpenters and other providers of local services for whom Square is perfect. For these small businesses, Square represents a much easier payment solution than having to have customers run to the ATM for cash or even writing out a check.
This is a new market for payments and Square services are likely to stimulate whole new types of businesses that could be an important stimulus for local economies. Think, for example, about a new generation of local entrepreneurs fed with GigWalk assignments and paid by Square. It could make a real difference in peoples’ lives.
The second class of early adopters are slightly bigger, independent businesses that already have credit card payment solutions but are looking to save money and get better functionality than what’s available from today’s payment processing machines. For some of these merchants, Square’s 2.75 percent fee represents a real savings.
The even bigger draw for these merchants though is better management of their sales data and better connections with customers. To this end, Square just announced a new app for the iPad called Square Register, which gives merchants a “Google Analytics-like” dashboard for managing all the transaction data that’s run through Square. It will also give merchants some very innovative tools for staying in touch with customers – but more on that in a minute.
“Register” is Square’s run at the Point-of-Sale (cash register) market. Over time, as the Christensen model predicts, bigger merchants will be tempted by the Square model because of the way it improves the retail shopping experience for customers. If you’ve recently shopped at an Apple store, then you’ve experienced the way employees on the showroom floor can check you out with specially-equipped handheld devices. It streamlines the checkout process in a way that really does improve the shopping experience.
One of the reasons Square is positioned to do well is that – in addition to its disruptive innovation strategy – it’s also running a market-bridging strategy; the kind you need when markets are in transition, as they are today with mobile payments.
The big shift now heading our way is the rise of the electronic wallet. It’s been predicted for years, but we are finally starting to see real progress in integrating payment processing with near field communications (NFC). Google, for example, made a big announcement yesterday about its plans for an electronic wallet for Android based on NFC (more on this below) and Visa is doing its own experimenting. But Visa is also taking an unspecified stake in Square – which suggests that they too believe it will take a few years for NFC to take hold.
Netflix didn’t beat Blockbuster by jumping straight to online distribution of movies. Many people, including the folks at Blockbuster, viewed all that shipping of DVDs through the U.S. Mail as a quirky distraction, but it turned out to be a brilliant market-bridging strategy. Today, Blockbuster is history, and Netflix is the dominant player in movie rentals both offline and online (their movie streaming currently accounts for 25% of North American Internet traffic!). Once NFC is available on a critical mass of phones, you can bet Square will shift to this new technology. But in the meantime, they are busy grabbing up market share based on a tweak on today’s solutions. Smart.
What About Us Shoppers?
Remember I mentioned that the Square Register also has some innovative tools to help merchants stay in touch with customers? Well, that’s the Square “Card Case.” When you buy something from a merchant who’s using Square, he or she sends you a link to the Card Case app for your phone – preloaded with a card for their business. Over time, you’ll add cards from other Square businesses that you buy from as well.
When you click on a merchant’s card in the Card Case, you’ll see your transaction history with that merchant – kind of like a consolidated, organized view of all your receipts from them. Once that merchant has run your credit card, you’ll be able to simply pay them directly from their virtual card in your Card Case (they’ll then run the charge on your card at some point later; it’s kind of like running a tab at a bar).
You can bet that Square will be rolling out all kinds of interesting features down the road to help merchants build customer loyalty and help them promote specific products and services. It’s a smart approach to facilitating commerce – and it definitely makes Square a company to watch.
What is Vendor Relationship Management (“VRM”)?
This is cool stuff. And there’s little doubt in my mind that Square and its fellow payment revolutionaries will radically change the way we buy stuff. But there’s one very important sense in which Square is just the latest rehash of the same tired story.
A few weeks ago, while at the Internet Identity Workshop in San Jose, I found myself drawn into to pretty much all of the sessions having to do with “Vendor Relationship Management” (VRM). While there, I also had a chance to talk with some of VRM’s main champions, including chief VRMer, Doc Searls.
I had heard about VRM years earlier, but never paid it much serious attention. Now that I’ve taken the time to dig into it, I’m here to tell you that there is something quite interesting to this stuff. It’s part of a broader technological trend now unfolding that I’m calling the “personal web.” I think it’s so important that I’ve added a “Peronsal Web” category to this blog and a “Personal Web” section to the blogroll (to the right) to help you connect with folks working in this area. I’ll be adding to both over time.
So what is Vendor Relationship Management and how might it transform commerce even more radically than what Square is doing?
VRM is a set of tools to help customers aggregate and manage their relationships with merchants on their own terms. It’s about flipping the model so that the merchant is no longer at the center, and the customer is. In the old world, companies aggregated and managed all their relationships in a Customer Relationship Management database. When, as a customer, I interacted with that company, all of the data generated from that transaction stayed with the company in this database. VRM flips this. It centers the data with me and I share it, as needed, with the companies I work with – on my own terms.
One of the foundational premises of VRM is that it works on behalf of the customer. If you’re planning to buy a new TV, your VRM tools will help you decide which model is the very best for you – and it will help you buy it on terms that are the very best for you. If you care about the planet, it will overlay sustainability considerations along side product features and pricing variables. You’ll be able to tune your VRM tools with a myriad of other variables as well, and it won’t be difficult because you’ll be able to swap in filters from various people and organizations whose values map closely to yours. There’s lots and lots of cool stuff to elaborate on here, but we’ll have to save those details for another day.
Conflicts of Interest
Again, the key thing to remember about VRM is that it works for you. VRM tool builders don’t get a cut of the sales going through the tool. They don’t get incentives to push this product over that product and there’s no advertising dollars to subsidize the cost of the tool. You pay for the tool and the tool works for you. Period.
This isn’t the world we live in today, of course. We’re used to a world where we use third-party shopping services like Amazon for free. It costs a lot of money to manage all that information and build all the software that goes into making an easy-to-use shopping service like Amazon. I know. I used to run a very large car online buying service and managing all the data needed to make that service work was a significant portion of our total costs of operation. Like Amazon, our business model covered those costs by simply marking up the end price of our products to customers. This is the standard retail model and it’s one we all understand and have come to expect when we shop online and offline.
It’s because of the success of this model that the idea of actually paying for a set of tools to help us shop seems downright strange. But there are two reasons why we are likely to find ourselves doing just that in the years to come.
The first reason that VRM tools will eventually take off is that the cost of managing shopping-related data will drop precipitously with the rise of the Semantic Web. I wrote recently about a demonstration Google is now doing with semantic search for recipes. These “smart” recipes now allow us to assign specific ingredients (like chicken, butter, pine nuts and mint) and Google will magically pull the right recipes from a wide range of sites. The cost of building tools for managing and manipulating this kind of data are will soon proliferate and when they do, the cost of organizing information will drop like mad. Once that happens, the economics change and you’ll be able to buy a really great grocery shopping app for your phone that will work in any grocery store and only cost you a few bucks. And because you paid for this VRM tool – it will work for you – not the grocery store.
The second factor pushing us toward a world of VRM is the growing awareness and concern around the privacy, safety and value of our personal data. One of the reasons we’ve gotten so used not paying anything for the online services we use is that these services are harvesting valuable personal data about us that they are then turning around and reselling to other companies. Most of Facebook’s high valuation is directly related to the goldmine of very personal information about you that’s locked up tight in the Facebook vault. VRM moves all that personal data back to you so that you’re in control of it. If you choose to, you will have the option of sharing it with merchants as you shop, but you will expect to be compensated for it in the form of lower prices or special services.
Thinking Outside the Square
So how does all this relate to Square? Well, on the surface, Square’s Card Case actually looks a bit like a VRM tool. But it’s not.
Square’s business model is based on the standard retail paradigm. The Card Case experience is very merchant-centric. You open a merchant-specific card within your case and that’s the way you shop for a shoe or a pineapple. But in a true VRM app, you simply say you’re looking for a pineapple and the tool helps you choose where to go.
Square makes more money when your Card Case motivates you to spend more – even when that may not actually be in your very best interest. That’s a direct result of the underlying business model that Square has chosen, and, by rolling out Register and the various tools it has for helping merchants promote themselves, Square is moving even further in that direction than the credit card companies. Square is not VRM.
I’ve got nothing against Square or what they’re trying to do with their business, by the way. If I were them right now, I’d probably be making very similar decisions. The NFC infrastructure and availability of semantic data just simply isn’t quite developed enough to make the economics of the VRM model work right now.
But it will one day very soon, and when that happens, get ready Square, because it will be you that will be disrupted. Doc Searls has some interesting thoughts on Google’s launch of Google Wallet. I agree with what Doc’s saying. Google has proven with Android and other technologies that it’s very willing to disrupt existing business models in order to achieve its mission of organizing the world‘s information and making it universally accessible and useful.
Square is well set to make money for the next several years. But over the long-haul, I wouldn’t bet against the disruption of VRM – and if that’s where Google’s betting, then that’s where I’d put my bet.