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Jack Dorsey specializes in simple ideas with outsize impact. Twitter, which he cofounded in 2007, began as a way for users to broadcast quick status updates to friends. Now it's a 200-million-member communications platform, where Dorsey serves as executive chair. His new company began with similarly modest aims: give anyone the ability to accept credit card payments through a tiny reader that plugs into their iPads and smartphones. Called Square, it has signed up hundreds of thousands of merchants and processed $66 million in transactions in the first quarter of 2011 alone. The startup is also building a vast database of financial information that its customers can tap into. It tracks each sale conducted through its credit card readers, allowing the company to calculate everything from the busiest sales day of the week (Saturday) to the average price of a cappuccino ($3.09 as of April 18).
The power of that kind of data analysis helps explain why Square was able to close a second round of funding in January: $27.5 million from Sequoia Capital, Khosla Ventures, and others, which valued the young company at $240 million. Then Visa invested an undisclosed sum in April. Wired sat down with Dorsey at Square's offices in downtown San Francisco.
Wired: You got the idea for Square after an artist friend lost a $2,000 sale because he couldn't process credit cards.
Jack Dorsey: Right now there are about 8 million merchants in the US that accept credit cards. That doesn't include people who do transactions over craigslist or dog walkers or people fund-raising for the PTA. There is such untapped demand. Like, we had a couch in the office that was really ugly, and we sold it for $5,000, and we accepted a credit card. There are moments in life when that's necessary. And that's what we're focused on.
Wired: You're also trying to change the experience of how we interact with money.
Jack Dorsey: Absolutely. Money is a concept that's been with us for 5,000 years, and it's never been designed to be anything but a burden. You come into my coffee store and order a cappuccino, and I hit the Cappuccino button on the cash register and see that it's $3.24. And I take your credit card and type "$3.24" into the credit card terminal. I swipe your card and give you the credit card receipt to sign. Then I take that back and staple it to the cash register receipt and give it back to you, along with your credit card. Then you take back the credit card and throw the receipts away. And meanwhile, at the end of the day I have no idea how many cappuccinos I sold because it's really difficult to access that information. It's completely useless.
Wired: You didn't know anything about the world of transactions when you started. How did you get up to speed?
Jack Dorsey: We typed "accepting credit cards" into Google. We learned how the whole system works. Basically any time someone uses a credit card, the issuing bank—the bank sponsoring that card—forwards the money to an account set up by the merchant specifically to accept credit card payments. The issuing bank gets repaid when the customer pays his credit card bill.
Wired: Sounds simple enough.
Jack Dorsey: It's not. We tried to get a merchant account ourselves, and it was just a disaster. We had to create a whole corporate structure. We'd sign up with one company, and they'd route us to a completely different organization. The whole process took four weeks. And meanwhile, we had to pay to get our bank account set up, we had to enter into a one-year agreement, and then we found out there was a monthly fee. And then we found out that there's something called a PCI fee. And then a gateway fee. And then we found out about the interchange.
Wired: What is that?
Jack Dorsey: It's the amount that you pay to accept credit cards. It ranges from 1.79 percent to 4 percent of every transaction.
Wired: All those fees go to the credit card companies?
Jack Dorsey: Everyone takes a cut—the merchant bank, the issuing bank, and the credit card company. And then there's the independent sales organizations, which sell the credit card terminals. They have fees.
Wired: So there are a million different parties and a million different fees.
Jack Dorsey: Yeah. We thought we could do it a lot better. We wanted to make it so anyone could go through that whole process in one download. You put in your name, put in your address, we ship you a reader, and you're done. And all of that for free. All you have to pay is 2.75 percent per swipe. That usually covers the interchange and leaves a small amount for us.
Wired: Why is a credit card necessary? Why couldn't you do all this through PayPal?
Jack Dorsey: Because not everyone has a PayPal account. People understand credit cards. They know exactly what to expect from them. They're used everywhere. But Square is payment-device agnostic. It doesn't matter how you pay. Some of our users accept only cash. They have a Cappuccino button or a Hot Dog button, and when someone orders a hot dog they hit the button and up comes an itemized total. The customer hands over their cash, Square calculates the change, and the merchant has a record of every purchase.
Wired: As a customer, when you give your card to someone with a traditional credit card reader, it seems official. You're dealing with an established merchant, part of a formal network—as opposed to Square, where anyone can get the device in the mail. How do you get customers to trust Square merchants?
Jack Dorsey: Every Square vendor goes through an identity check. You download the application, you put in your name and your address. And then we ask you three background questions to confirm your identity, stuff that only you would know. In addition, a lot of the protections are built into the card itself. Every transaction goes straight to the bank that issues that credit card, and it's also being watched by Visa or Mastercard or AmEx. There are several parties that are watching every single part of every transaction.
Wired: So if I give my credit card to someone with a Square reader, I can be comfortable that I won't get dinged with a bunch of fake charges.
Jack Dorsey: Well, again, if you use a credit card, the bank that issues the card handles a lot of that risk. The risk we have to address is when we can't prove the card was there—like a phone order where there isn't an actual swipe. What you have to worry about is not someone coming in and stealing $1 million but 1 million people each taking $1 in a highly organized effort. That's not unique to Square; any payment company has to deal with that kind of risk.
Wired: How are you dealing with it?
Jack Dorsey: We have a team of about 10 people who work on risk, and that number is growing quickly. We have a review process. If a merchant records an unusual number of charges, we'll contact them. It's like when I go to France and make a purchase. Without fail I immediately get a call from AmEx asking if I'm actually in France, before they let the charge go through. It's the same model, just applied to merchants.
What you have to worry about is not someone coming in and stealing $1 million but 1 million people each taking $1 in a highly organized effort.Wired: You're also using social-networking data to verify what's a legitimate business and what's not.
Jack Dorsey: Yeah, if users want to accelerate our review process, they provide us with information that helps us further validate their identity. They give us the name of their business so we can check them out on Yelp. We can use Google Maps to see where they're located. Or they'll give us their Twitter or Facebook account.
Wired: Speaking of Twitter, it started as a way for people to tell one another what bar they were going to. Now it's a mass communications network. Do you see similar potential for Square?
Jack Dorsey: On the web, companies use things like Google Analytics to learn how people are interacting, what people are driven to, and why. People use that data to build their businesses. But offline merchants, who still account for 94 percent of commerce in the world, have no real way to capture that kind of data. Square can tell merchants how many cappuccinos they sold for the day. And then they can start mining that data. Like what percentage of people that bought cappuccino also bought biscotti? What happens when it rains? What are my busiest hours? That is critical data that most small businesses just don't have.
Wired: What effect do you think Square can have on the broader credit card system?
Jack Dorsey: Well, we're very effectively adding more information to every transaction, so everyone can have more confidence in it and lower the risk of fraud or nonpayment. If we can lower the risk systemwide, then we can also lower the interchange rate that credit card companies and banks charge.
Wired: So fees could come down as the card companies take on less and less risk.
Jack Dorsey: And that affects payers. If you lower the merchants' costs, they can charge their customers less. So you can fix the whole ecosystem.
Wired: When, in your mind, will Square have broken through? Is there a number that indicates that you've made it?
Jack Dorsey: We look at a lot of different numbers—volume going through the system, active users, sign-ups, risk. Some combination of all of those things implies concrete success. I'm not sure what that combination is right now, but, you know, we're only two years old.
Senior editor Jason Tanz (jason_tanz@wired.com) wrote about filmmaker Charlie Kaufman in issue 16.11.
