Before I jump into an analysis on what does and does not make them interesting, it’s important to note that my current company, Digital River, as well as a number of others provide very similar solutions to both of these companies.
THE BASIC STUFF
Physical versus online – They’re often talked about in the same breath, but the biggest difference between the two is that Square is primarily used in the physical world (with that white device that you plug into your mobile phone or tablet) and Stripe is used by merchants who sell in the online world. In credit processing speak, that’s Card Present versus Card Not Present (CNP).
Processing – In the end, both Stripe and Square act as a payments facilitator or master merchant to board all of the businesses that process with them. It’s basically what PayPal does as well, so nothing too crazy here. The actual bank that sits behind Square is Chase and for Stripe it’s First Data to Wells Fargo. They’re taking on a bunch of risk by acting as the master merchant, but if they can put reasonable controls in place to monitor their merchants then they can balance the risk exposure within their portfolio. Of course, it doesn’t hurt to have raised a lot of capital to make banks like Chase and Wells feel a bit more comfortable with the whole idea of it, because in general, the payments facilitator model is something that is easier for a more established player than a fledgling payments start-up.
Easy integration – Stripe and Square both tout how simple it is to integrate to them. It’s true that they along with Braintree really have changed the conversation around an easy painless solution to taking credit cards. Before that, start-ups and small merchants had a choice between either PayPal or Authorize.net, and neither was very good. The ease of integration, stellar developer community support and mobile-centric ethos of Braintree is one of the reason’s that it was picked up by PayPal for $800M last year. Today, there are plenty of options for easy to integrate payment gateways and full service acquiring solutions both for the SMB and Enterprise level merchant.
THE EXCITING STUFF
Over a Billion Dollar Valuation and Counting - This January, both companies raised rounds of capital that pushed their valuations sky high. Stripe raised a series C round at a valuation of $1.75B and Square raised a series D at a valuation of $5B. Everyone’s anticipating IPOs in 2014 or 2015, and it doesn’t hurt to have tech-celebrity founders like Jack Dorsey running the show. When was a billion dollars… or five… ever not exciting?
Simple and frictionless – For a long time, the lack of transparency in pricing, reporting and integration coupled with the pains of getting a merchant account has been an accepted truth for merchants, especially start-ups with little to no transaction history. As the payment facilitator model became a more acceptable model among bank acquirers, companies like Square and Stripe decided they could disrupt the system by taking a tech approach to these problems. If they could find the financial capital to be the master merchant, they would be able to eliminate many of the banking level challenges: merchant on-boarding, poor analytics, pricing transparency, etc. This is something that PayPal could have done, but they didn’t. As a result, these new payments start-ups had an opening to provide easy to understand pricing with a dead simple integration and informative reporting.
Value beyond the transaction – Because of all of the challenges that merchants faced on simply getting accounts and accepting credit cards, it was more or less given that you weren’t going to get anything else besides the actual processing of a transaction. Be happy that the transaction went through, take your cut, and move on your merry way. Or something like that. But as competition increased, the only lever to pull was cost and that meant shrinking margins for payment processors and banks alike. Rather than work on lowering merchant costs, these new players focused on increasing the perceived value of their offering. In addition to simple pricing, reporting and integration, merchants now had better ways of converting their customers through one-click buying, optimized mobile integration and seamless sharing of masked card data between other merchants. In addition to the internal hype that was being generated by the Jack Dorsey’s of the world, it was this new take on added value that got merchants to actually stand up and sing the praises of a processor. And that was something new.
When I look at what payment processors are doing today, it is obvious to most of the players that this value based approach is the way to make money for the future and avoid the race to the bottom. The majority of offerings today come with a card reader like the Square device and potentially even a chip and pin option in international markets. Developer communities are becoming more common place, and they will be standard among anyone in the payments acceptance business. What makes Square and Stripe so interesting is that they were among the first to be extremely successful in scaling their business through this new approach. What remains to be seen is whether they can achieve the promise of their high valuations and the associated hype.