There’s a not-too-quiet rivalry brewing between Square and PayPal over offline payments, and this week saw the unofficial opening of an important new theater: the SMB point of sale (POS). It’s perhaps the stickiest problem for both companies to solve in order to make payments work, and their respective announcements demonstrate a strategic schism similar to what we’ve seen previously in the evolution of desktop computers and mobile phones.
So let’s quickly review the products, which each company announced this week. In Square’s corner, there’s a well-styled iPad stand with an attached credit card reader meant to accompany the company’s existing POS application. In PayPal’s, an offer to provide free credit card processing for any merchant who trades in their existing register for a cloud-based POS system built by a select group of partners.
The big shift at play here is that we’re no longer talking about the dongle-wielding flea marketers, for whom credit card acceptance and POS systems were newfangled concepts before these devices. Instead, this week was about moving upstream to serve the higher end of the SMB market, says Mary Monahan, a senior analyst at the strategy and consulting house Javelin Research.
“They started out with simple mobile POS systems for smartphones [in dongles], and now they’re going after these higher-end markets,” says Monahan. “And as they continue to go up, they have to bring out more and more services in order to meet the needs of these higher-end consumers.”
The move upstream comes with a number of challenges. As Monahan points out, it necessitates the addition of other services like inventory and employee management, as well of a host of vertical-specific services as well. And as the depth and complexity of the offerings expand, the POS providers are on the hook for customer service and other support.
Compounding the iPad POS’s more complex feature set, it’s also a harder sell. Unlike the dongle market, the small business owner who would buy an iPad POS product likely already accepts payments, and has entrenched back-office processes in place that typically center on a legacy POS system. That means the switching costs are higher and the immediate value a business owner sees from an ePOS is incremental. The long-term value of an ePOS systems is still nascent, and the immediate value — cheaper transaction processing from Square and PayPal (without a discount) — is marginal.
Open vs. Closed
The gist of PayPal’s and Square’s long-term aspirations is fairly clear: create a two-sided network with a consumer-facing mobile wallet on one end and a merchant processing network on the other, creating a system that gives them control over the entire payment stack. Once that network is intact, the companies can build a number of other services on top of a consumer’s purchase activity.
However, those ancillary features — namely, advertising, loyalty, fulfillment services — require a cloud-based piece of software to sit at the point of sale to not only manage the transaction, but also to work as an operating system bridging the multiple programs a business runs. It’s in this connectedness (the ability to track a consumer from an ad impression on a mobile device to a purchase made in-store, and then use that data to inform a loyalty campaign later on) where ePOS systems will eventually offer the most value to businesses.
The question facing PayPal and Square is how to expedite the adoption of these ePOS systems by merchants in order to accelerate the use of their payment services. PayPal has taken a decidedly open approach, partnering with a number of young, ePOS startups like Shopkeep and Leaf and then adding free year of payment processing for merchants who adopt these programs. Square, on the other hand, has chosen to sell its own POS product, subsidizing the cost of processing other credit cards with an extremely low rate.
“Payment plays are big number games. They have to get a lot of consumers and a lot of merchants on board to get it to pan out,” says Monahan. “That’s why you’re seeing free, no-interchange offers. But as the market matures, some of the offers are going to change. It’s the typical cycle of a new market.”
A familiar analogy
The open vs. closed debate is a familiar story in the technology industry, a cornerstone of Apple’s battles with Microsoft, or, more recently, Android. It’s an analogy that Aron Schwarzkopf, the founder of Leaf, one of the tablet POS systems with which PayPal has partnered, uses in thinking about the POS and payments market.
“Microsoft was able to grow a lot faster because it partnered with so many people. but of course it sacrifice the end experience, because they couldn’t control everyone,” says Schwarzkopf. “Square will always have a beautiful product with deep control over the end-to-end experience, but will they be siloed to be the small player to have this experience.”
It’s unclear whether Square plans to open its point-of-sale system up to other developers, but given the breadth and complexity of services needed to compete in multiple verticals, tying its payment product to its POS services might limit its scale, particularly as it moves upstream.
Steven Jacobs is deputy editor at Street Fight.