Let’s look at the monthly pricing plan first. For many retail businesses—small businesses and huge ones alike—credit card processing fees rank among the top monthly expenses. The worst part isn’t that the fees are high, but that they’re mysterious and unpredictable. My sister owns a cupcake store in Southern California. When I asked her what she pays for processing credit cards, she didn’t know; when she showed me her five-page monthly bill, I understood why. There were dozens of lines of charges—she pays different prices for different kinds of cards (there more than 10 kinds of Visa cards listed on the bill, and almost as many MasterCards), plus various other fees and cryptic surcharges. Like all payment companies, the processing firm she uses had advertised a very low per-swipe fee. But those advertised prices usually turn out to be ephemeral. When I studied her bill, I determined she was actually paying a sky-high 4.2 percent average fee per credit card transaction.
That’s what’s so great about Square’s new plan: Not only is the price super low, but it is extremely simple to understand—until you hit the company’s transaction limit, you’ll pay the same monthly rate for every card you swipe (even American Express, which has historically charged higher fees). “We priced it like your rent,” Rabois says. “We made it predictable so you don’t have to deal with that shifting level of exposure.”
I wondered if Square’s price was too good to be true. After all, the company has raised millions in venture-capital funding, so couldn’t it just be doing what all venture-backed companies do—offering its services at an unprofitably low price to achieve huge market growth? But Rabois said he expects the plan to be profitable, and he offered a couple reasons why. First, Square is extremely efficient. Other companies hire a sales force to peddle their services; Square doesn’t do that. Instead, it spends most of its resources building great software and hardware, and it expects to win adherents based on the strength of its superior product. “The entire cost of running this business on the human side is incredibly low,” Rabois said.
But the more interesting reason why Square might make a profit is that it believes it can change customers’ shopping habits. Its pay-by-name system is so much of an improvement over the current way we pay that, over time, Square believes it will raise transaction volumes—people will buy more stuff because buying stuff is easier.
To explain this effect, Dorsey offered a story. "When was the last time you were in a luxury clothing store?" he asked. I told him I’d been to the local Thomas Pink store not long ago. (Dorsey has a well-known penchant for Prada suits, but he didn’t judge me.) “OK, you go to Thomas Pink, the Prada store, the Hermes store and buy a tie or whatever. You’ll notice something interesting. When you go to pay for it, what they do is take your card and go into a back room. They process it, and they bring out this beautiful leatherbound thing for you to sign. Then they go to the back again, and they come back with this at least $5 or $10 envelope whose only purpose is to hide the receipt. They make it feel like it's a tiny gift, because the whole process is so ugly that they have to hide all of it. It would take away from their experience if they didn’t do that.”
Not every business can afford to give you a $5 envelope to make you feel better about paying. But Square is the next best thing. Every other company that’s looking to modernize the payments business is working to fix what Dorsey disdainfully calls “payment mechanics”—they’re just figuring out ways for you to pay with your phone instead of your credit card. Dorsey’s aim is much bigger: He wants to remove the psychic baggage surrounding money, “which is something everyone on the planet interacts with and we all feel bad about.” Dorsey believes that when you keep money invisible during a commercial transaction, the experience will improve for everyone. He offers another scenario, one we’ve all experienced. “You go out and have a great meal,” he says. “But it’s the end of the night, you’ve been there for two hours—and now you have to wait another 30 minutes because they forget about your bill. And that ruins the night.” Imagine if, instead of that delay, you could have just told your waiter to put the bill on your tab before you even sat down. Then, when you’re done eating, you can walk out whenever you like, adding the tip on your phone. Wouldn’t that be fantastic?
Square has lots of rivals. In addition to traditional credit card processors, PayPal, Google, Groupon, and even Apple might be gunning for it. But Dorsey is the only guy in the industry who’s thinking about payments in a deep way, and Square is the only payments company that’s innovating on hardware, software, and price. Now, as we approach the launch of the Starbucks collaboration, I think we’ll see this approach pay off. This will be Square’s moment: Millions of people will see its magical payment system in action for the first time. Once they get hooked on it, they won’t want to stop.