The company launched Square App Marketplace yesterday to allow third-parties to develop applications that integrate directly into its point-of-sale product. The move marks an important step in the company’s evolution as it shifts focus from consumer-facing payments to an arguably much larger business software market.
The marketplace represents the opening of the company’s year-old software partner program that has produced integrations with the QuickBooks, SumAll and a handful of other providers. The details of who can integrate remain unclear, but a Square spokesperson confirmed that the marketplace will not be open to payment processing products, forcing merchants to continue to use Square’s service.
Among the business software players, a third-party marketplace is not a new concept. Small competitors such as New York-based Shopkeep have taken a more open approach to building the technology stack from the beginning, integrating with back- and front-office software providers and often criticizing Square for its more closed approach.
Today, Square finds itself in an interesting — if not, advantageous — place. Earlier this year, the company killed its mobile payment product, opting instead to launch for a more focused online ordering application that allows consumers to buy a coffee for pickup on a mobile device. The move effectively demoted its consumer-facing strategy in favor of a deeper focus on the business software segment.
But the company kept a critical part of its consumer product: the business model. Whereas other firms sell their point-of-sale software as a monthly package, Square still makes its money from payment processing. That means that while the marketplace will be open to the rest of the business stack, payment processing tools will likely never be welcomed.
The decision to monetize payments — as opposed to software — is dangerous, but potentially very profitable. A payment-processing model allows the pricing structure to scale naturally without the tiering that a SaaS businesses needs to create. It also creates an incentive for the company to play a role in demand generation, and leaves the door open for consumer applications such as its now-killed payment or Order product.
But payment processing also poses risk. The downward pressure on interchange rates will likely continue, which means that merchants eventually will need to understand that the payment processing charges subsidize the software. If the company cannot charge a premium on its processing cost then it will be tough to grew the average revenue per user.
The opening of Square’s network should be a boon for small business software providers. These operations firms provide a new channel through which marketing, accounting and other small business software providers can more efficiently bring products to market. In many ways, these platforms could play a similar role as Apple and Android AppStore in the consumer-facing mobile software market.
Steven Jacobs is Street Fight’s deputy editor.