By KYW tech editor Ian Bush
PHILADELPHIA (CBS) — Once you’ve helped start one of the world’s most popular social networks and made billions of dollars, what’s next? For Twitter founder Jack Dorsey — now, the CEO of Square — it’s about helping small businesses take off.
At HubBub Coffee, it’s full steam ahead.
“We’re really trying to build a brand,” says owner Drew Crockett. HubBub has grown from a coffee truck to three brick-and-mortar stores; the newest is in Radnor. And he wants new cups — bold, red ones.
“It’s a great walking advertisement,” he says.
It’s also a big investment. That’s where Jack Dorsey and Square come in.
Square Capital offers money next-day at the touch of a button for small businesses that use Square — those white iPad terminals you may have swiped your credit card through at a check-out. The advance is paid back through a small percentage of each of those card sales.
Square’s strategy — buoyed by a new round of financing totaling $100 million, valuing the company at $6 billion — comes in the face of competition from Amazon’s new low-fee credit card processing and uncertainty over how Apple Pay will play with the industry.
“The majority of our business is really around the services to help make commerce easy and to help grow the business,” Dorsey explains. “Payments is just one tiny little piece of it.”
I interviewed Dorsey and Crockett at HubBub’s 17th and Arch location.
(Ian:) I’m intrigued by Square Capital in that you could consider it a parallel to your own involvement with wooing investors and their cash for your projects. Now you’re kind of playing that role for small businesses.
(Jack Dorsey:) No matter the business type or business size, there are always three things that every business needs — whether you’re a Facebook, a Twitter, a Square, an IBM or Microsoft, or you’re just getting started as a piano teacher.
Number one is access to capital through investment and through revenue that actually grows the business. Number two is new customers — sales. Number three is tools to retain those customers.
Square has always been about addressing those three needs. When we first started Square, access to capital was really around making sure that we paid our sellers as quickly as possible when they swiped those cards. So the industry average was around 1-2 weeks after a card was swiped that they’d actually see that money in their bank accounts. We made a promise that we’d actually deliver that money the next business morning.
It’s really important to businesses, because they have that money to spend on inventory, on paying their employees, on marketing. And that’s meaningful. Square Capital represents a new service in that we have a deep understanding of our customers, of our businesses — unlike a bank, unlike a typical advance system, we have an understanding of everything that’s going on in their business, everything that’s going on with their employees, with the items they sell, with their industry. And we can send them an email, saying here are three options for an advance. They touch one of the buttons and the money would be in your bank account the next business morning.
So it could be $1000, it could be $10,000. All the fees are right there, they’re up front. There’s no timeframe to pay it back. If your business is really slow, and it takes you a while to pay it, that’s fine. If your business is going amazingly, you pay it back quickly — that’s also great. So we want to provide a lot of flexibility, but also access to capital that’s actually meaningful for people.
Whether you’re a salon and getting a new chair or you’re a coffee location and you’re paying for new marketing or opening a new location — whatever your business needs, you have this access to capital. And the way it’s actually returned is just by swiping your customers’ credit cards. So it’s built into the course of doing your business. And we haven’t seen another program like it that allows the speed, the cost efficiency, that gives you that time back — and saves you that time so you can really focus on your business instead.
(Ian:) Even as this economy continues to lift itself from the doldrums, some entrepreneurs are still finding it tough going to secure traditional financing. You argue that this is easier to obtain?
(Dorsey:) We don’t require a bank visit. We don’t require any collateral. We have all the information you need. You download Square Register, you start running your business. In three months or six months, you may get an email from us that says here’s access to capital. Tap on this, and you get it the next business morning. Everything is up front, so you actually see the fees you’re paying right there.
You can go to a bank and compare it, but often what you’ll find with the bank is often it takes anywhere from six months to a year to get alone. The fees are much higher. It requires a ton of information, and potentially collateral as well. That’s all time that you could be spending building your business or focused on your customers or your employees, or thinking about opening a new location.
Square has always been about speed — whether it’s how quickly you get the money from the credit card sale you just made to how quickly you see your business in real-time through our analytics.
(Ian:) Drew, I see your coffee servers running those Square Registers at the till…
(Drew Crockett:) We’ve been a Square customer for a while — almost four years. When this [capital] program was launched, we got an email asking if we’d like to participate. Clicked a button, the next day, the capital was deposited into our account, and we’ve been able to put it to work right away — which is pretty cool.
(Ian:) Tell me what you’ve done with it.
(Crockett:) We’ve done two main things. We’re really trying to build a brand. You have to invest in the little things. Examples are having graphic design and print work done for catering menus. Might seem simple, but it’s an investment that it something you can actually measure a return on, and it’s part of our business that we’re able to explore that we weren’t able to before.
A little bit bigger project that we’ve been able to go after with the use of Square Capital is using our cup as a real asset. Every customer that comes in our shop, if they’re taking something to go, they leave with a cup in their hand. It’s a great walking advertisement. On some level, depending on who you talk to, it shows an affinity for the brand and our company, which we appreciate. And it’s something that, given the opportunity, we’ve always wanted to take better advantage of.
Problem is, when you want to get cups designed specifically for your company, it’s very cost-intensive. Not because it costs a lot to print the cups, but because you have to buy on such a volume level for it to make sense. When you’re buying a case of cups at a time, it’s cost-prohibitive.
So what Square Capital allows us to do was to invest in a 50,000 cup production at one time, and that significantly brought our cost down, and it’s a real-world example of ease in use of a service like Square Capital.
(Ian:) Is the kind of monetary commitment that Square makes enough to help fund a further expansion of a place like HubBub?
(Dorsey:) They grow quite large as well. A significant percentage of the folks who receive Square Capital get another Square Capital advance. As we build more understanding and more trust between the two parties, those can grow. A good example of this is Cafe Grumpy in NYC. They opened their fifth location using Square Capital in Grand Central Terminal. Prime location, took over from a Starbucks, a lot of walking traffic through the business — and that was all done through a Square Capital advance. We want to make sure it’s not just flexible in terms of the business itself, but also their needs and their growing needs. Because as a company grows, it does need more access to capital and we want to make sure that we’re a great option so they can get that quickly and focus on building the business and really hitting their ambitions and aspirations. We work with investors — we just announced that one of our partners, Victory Park Capital, made a huge infusion in Square Capital so that we can continue to grow this program for more and more of our sellers.
(Ian:) Drew, how have you found the economy for your small but growing business?
(Crockett:) I think for us, coffee is — some people refer to it as an affordable luxury. I think most of our customers are the type of people who see value in the product that we’re serving. But I think it’s really just us staying focused on what we’re doing, which is about really building a people business. Coffee is a great way for us to connect with people. So good economy or bad, we’re thankful that our customers have grown with us and supported us from our first days in the truck to where we are now.
(Ian:) Jack, your recent round of funding ranks Square among the top venture-backed companies. This is dramatic news, especially as you face new competition from Amazon. Do you see Amazon undercutting your fees as a major threat?
(Dorsey:) I guess we’re focused more on what can we be doing for our businesses. A lot of folks focus on Square as a little payment device — something you plug into your phone and something that sits on your counter. But the majority of our business and the majority of our usage is actually the software — the Register.
Payments is just one tiny little part of that. A lot of our competition has focused on probably the smallest part of our business, which is accepting that payment. It’s extremely important — we want to make sure our sellers can accept any form of payment that comes across the counter. Credit card was the one there was a real gap in. But I think we’re building an ecosystem around the register — we’re building a way to not only run your business but also hook up to everything your business needs.
We have a lot of merchants using QuickBooks, for instance. QuickBooks instantly integrates with Square Register, so you can account for your entire business as well, just by flipping a switch. We want to make sure we’re fitting on the counter and actually adding more value instead of something you plug into your phone just accepting a credit card. That’s where a lot of our business is moving, and I think we have a lot more momentum than the other guys in that understanding.
(Ian:) Part of that value equation must include things like Apple Pay and bitcoin. Can your equipment accept those now, or do you have plans to add that capability?
(Dorsey:) Square Market, our e-commerce system, accepts bitcoin today. For any item in your inventory, you can sell it online and people can pay with bitcoin, for instance. Apple Pay we see as a huge opportunity. NFC [near-field communication, the technology on which Apple Pay is based] has not had a lot of traction in the United States. It’s had a lot of growing traction around the world. And Apple has the potential to really change the dynamic there.
We have this philosophy: we want to make sure that no matter the payment device, our sellers are empowered to accept them. We want to make sure they have that ability.
(Ian:) Is there a date by which Square Registers will be able to accept NFC-based payments?
(Dorsey:) We don’t have a date yet, but we’re going to make sure people are empowered as quickly as we can.
(Ian:) What’s your strategy? Is Square still primarily a payment processor?
(Dorsey:) The thing we’ve always focused on what is the most critical thing to solve. What we saw five years ago is that everyone was carrying a plastic card in their pocket, and barely anyone could accept them. We explored why these sellers couldn’t accept them. Going to the bank to actually get a merchant account was this crazy, obtuse process that was extremely costly, took a long time — a month, usually, to get a merchant account. Only 10 percent of the people who applied to get a merchant account to accept credit cards would actually be accepted by the bank.
When we came in, we said we have a goal of getting 95 percent of people who applied to accept credit cards on board with Square. What that meant was that they would never miss a sale. As a buyer, if you didn’t accept credit cards, I would go somewhere else that did, or try to find an ATM. And that represented lost sales for people. That was the most critical thing to solve. But as soon as we solved that, it’s really about running the business and accounting for the business.
That’s where the register really grew up and became a big focus of our business. Payments is just one tiny little aspect of commerce: commerce is very broad; it’s the activity between a buyer and seller, inclusive of marketing to the buyer, the decisions they make — but it’s also inclusive of everything in the backend — analytics, employee management, customer relationship management, feedback from customers and managing that feedback.
So we believe the majority of our business is really around the services to help make commerce easy and to help grow the business. Payments is just one tiny little piece of it.
(Ian:) As a shopper, I sometimes feel guilty swiping a card — especially at smaller retailers — knowing a merchant has to pay pretty exorbitant fees to process my payment. Should I?
(Crockett:) I think at the end of the day, whatever that fee is — if you’re a forward-thinking business — it’s kind of the cost of doing business. The majority of our sales now — 75 percent — are cards. If you go back five years, when they initially created Square, it gave companies like ours the ability to capture sales that we wouldn’t have otherwise.
We’ve been able to benefit from the services and analytics that they’ve developed along the way. So it’s become a much more comprehensive tool for someone like me as a business owner, and we can not only accept credit cards with Square, but we can run our business with the tools they provide.
(Ian:) Jack, while we have yet to see Apple Pay in the real world, do you fear Apple’s entry into the market? Could it cause you to struggle to attract new customers?
(Dorsey:) We’re focused on a fast buyer experience. If you have a fast buyer experience, our sellers make more sales. So we have to keep in mind that Apple Pay is using an open standard, which is NFC. There were a few fits and starts around its adoption — a lot of issuers built-in NFC chips to their cards, but there was a problem on the acceptance side. No one could actually accept those cards, so putting your wallet next to a terminal just wasn’t accepted en masse.
Given the huge amount of phones that now have this built-in, there might be a tipping point where NFC is more of a standard and people have an expectation that it works more and more, so we see it as an equivalent to swiping a card. You don’t have to get your wallet out — you just tap and you’re done. Maybe that convenience and speed is enough to really cause a tipping point, and we want to make sure that Square is there for our sellers so they can accept that energy.
(Ian:) What about you — what’s next? Do you have another couple of companies left in you, or are you perhaps looking at shifting gears?
(Dorsey:) Square and Twitter is it for me. There’s nothing more fundamental than commerce and communication.
(Ian:) Tough to beat having a Twitter name like @jack.
(Dorsey:) That’s the benefit of starting first. I’ve never had that opportunity on any other social network — I might have to start another one to get it!
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