Watch out Goliath! Why payment processors shouldn’t take Square’s success lightly

Industry disruptors are enabled by their competition. They succeed because the industry leaders stand still as disrupters grow. Large companies with well-established ways of doing business often do not have the foresight to recognize which trends are fads and which will reinvent their industry. This could be the case today with Square in the payment processing industry. But how can payment processors, acquirers, and super ISO’s figure it out?

They can start by learning lessons from other industries. The home movie rentals industry recently went through a significant disruption: movies can now be delivered over the internet instead of through retail outlets and played on computers or mobile devices instead of DVD players. Blockbuster, a well-established leader in an industry with huge barriers to entry, has since gone bankrupt.

How did Blockbuster, which in 2004 had 60,000 employees and nearly 20 years of industry experience, lose its competitive edge to Netflix and find themselves at the point of bankruptcy? In hindsight we can take a look at how Blockbuster should have responded to Netflix, and give an example of how payment processors and super ISO’s should be thinking about Square today.

Like Square, Netflix began trying to solve a problem with the existing system – the annoying problem of late fees. In 1999, Netflix introduced its signature flat-fee unlimited rentals business model that began to revolutionize the movie rental industry. Their success was not immediate, but gradual. Management at Blockbuster had ample time to formulate a response. What they should have done was to cut its fixed cost by reducing the number of stores, and introduce their own unlimited rental plan. But the actions they took were too little, too late. By 2010, Blockbuster filed for bankruptcy.

This should serve as a cautionary tale for payment processors who are slow to respond to the rapid success of Square. Companies that fail to innovate and adapt eventually lose their market position, but usually not immediately. In order for the disrupter to earn the credibility to compete with the incumbent firms, the challenger often first establishes themselves with the long-tail customers – those that the incumbent companies do not care about or cannot reach themselves. And that is exactly what Square is doing.

Square is currently successful at fulfilling the needs of the long-tail customers, a segment that larger banks can not reach with their existing technology. Long-tail customers are the farmers market merchants, food truck vendors, and other small business that typically operate on a cash basis. In this space, Square (and other micro-merchant payment processors) has little competition from established firms because they are the only company with a cost base low enough to profit serving such low volume customers. Square fills a need for payment processing that is currently being filled by cash or, occasionally, checks. The bigger payment processing service providers should take notice, even if they are not yet directly competing with Square. By monopolizing the long-tail customer segment, Square will be able to establish a foothold in the industry and eventually pick up enough momentum to challenge the status quo. And they’ll do it with a much lower cost base.

Think about Blockbuster trying to build their own mail order or streaming movie service in 2007. No matter how much money they had to throw at the problem, it was too late.

In fact, Square has already taken the next steps to become a major player by signing an exclusive deal with Starbucks. This is a sign for payment processors, acquirers, and super ISOs to take notice of. They must realize that Square already offers a better customer experience to small merchants and is quickly expanding their customer base upwards. Established business processes are slow and outdated, and need to be reengineered. The days of two-week long customer onboarding periods are over; customers today are demanding what Square is offering: onboarding in 15 minutes.

Competing with Square with a feature list is not enough because they will gain feature parity. You must beat them at their own game, or they will beat you at yours.

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This post is the second of a four part series on how Square is disrupting the payment processing industry. Using innovative business processes they provide a better customer experience to their customers at a lower cost than their competitors. We’ll discuss our thoughts on what makes Square different, how Square has achieved success, and what payment processors, acquirers, and super ISOs can do about it. Visit Square’s website.