Editorial Square gets the attention, but credit cards rule

Lower Manhattan, Pearl Street, the Financial District. A Starbucks with broad windows, great for people watching. Sipping my $5 flavored coffee, I watched a homeless man sit on the sidewalk. I liked him immediately: his sharp gaze and thoughtful expression. When I left, I squatted down next to him and put five bucks in his jar, contributing the cost of my first-world coffee to the man's case for survival.

We talked. He knew his tech, this man of no possessions, describing his favorite productivity gadgets of the past decade, scorning Apple for form over function. He had been living on the street day and night for two years. My five dollars was "huge," he said. I knew that was true only microcosmically. He liked cigars. That's where the cash would go.

Meanwhile, Starbucks had recently cut a deal with Square, one of the hottest startup stories of the season, so that people with five dollars to spend on coffee needn't pull out a wallet and ponder their privilege.

The deal

It's interesting to note that while media coverage of the Starbucks / Square deal heralded the end of cash, Starbucks was already a cashless experience for many customers. Company CEO Howard Schultz refers to Starbucks as "the largest retail mobile payment platform in the US." In fact, 25 percent of all transactions are made via the Starbucks Card, either by swiping plastic or using the card-enabled iOS and Android apps.

Editorial Square gets the attention, but credit cards rule

Starbucks would prefer to avoid touching your grimy dollar bills. (And perhaps a cashless society would be a healthier one for the reduced germ circulation.) But the main reason for any business to encourage adoption of a wholly digital, and ideally wholly owned payment system, is the reduction of cost on the back end. However the advantage of Square is debatable in this regard, since Square takes 2.75 percent of the transaction, in line with the revenue share enjoyed by credit cards. As a transaction enabler, Square helps merchants with the setup stage of accepting credit cards. But it is really card fees, cutting into slim margins, which prevent about 55 percent of small businesses from accepting plastic.

Transaction fees imposed at the cash register serve as the fulcrum in an immense and long-running battle between merchants and banks. Settlement of a recent lawsuit pitting small businesses against Visa and MasterCard allows merchants to charge an inflated price for credit card payments, passing the fee to customers. That settlement is merely a bugle call to further battles soon waged over the question of whether banks exercise monopoly power at the (increasingly misnamed) cash register.

The real value of Square, as a mediating enabler of cashless purchases, kicks in for a non-traditional small business such as an artist who sells paintings at regional art shows. That person might capture formerly lost purchases via Square that make the underlying fee a trivial, high-ROI cost.

One reason Starbucks is an operational leader in payment technology is that in many transactions Starbucks owns the credit card (the Starbucks purchase card). In that context, the deal with Square is an odd step backward for Starbucks. Square is also an unfavorable payment choice for existing Starbucks Card holders, who receive card membership benefits they wouldn't get by using Square at the register. It might therefore appear that the Starbucks / Square deal is weighted toward Square, but there is an equity piece to it. Starbucks invests $25 million in Square and Schultz also joins Square's board of directors. Those factors help balance the weight.

Square is positioned as a B2B provider, and the consumer proposition is weak. It is based mostly on cool. It streamlines a payment process that is already nearly frictionless -- using a credit card. It makes us feel like we've leaped into the future, living in a science fiction movie, when in fact nothing much has changed. Talk about form over function.

But the Square platform has received massive affirmation from a global retail chain. Now ensues a race for critical mass. Platforms beg for adoption: the bigger the platform adoption among businesses, the more useful it is to customers. And the more a platform is used by customers, the more demand there is for platform extension among businesses. Square is dearly hoping for the day when small business customers complain if they can't pay with Square's smug hand-in-pocket method, as they complain now to merchants who don't accept credit cards.

The state of cashlessness

Editorial Square gets the attention, but credit cards rule

My household is mostly cashless. My wife and I use a credit card for all normal purchases, mainly because it makes household accounting and budgeting easier. She doesn't carry cash at all. I do, but as I sit here thinking about it, I can't remember why. We write checks so rarely that it is a crisis when we must -- the checkbook is buried under some long-forgotten pile. Our lifestyle is fairly common: 43 percent of Americans live cashlessly for at least a week at a time.

The credit card system is the primary vehicle for digital personal finance. Short of a national program for attaining complete digitization of money, as Sweden has, there are two main obstacles to universal adoption of virtual money. First, as noted, it is expensive. Credit card companies mediate cashless transactions, and intermediaries add friction in the form of service expenses -- those fees that small businesses despise. I can get into the New York City subway system without dollar bills (buying a smart MetroCard from a dispensing machine that taps into my credit card), but I can't buy a candy bar from a newsstand on the platform with anything but cash. Oh right; that is why I carry cash. I love my Snickers.

If business reliance on cash is the practical roadblock to complete digitization, the conceptual hurdle is privacy. That MetroCard I use in the subway keeps track of where I enter and exit, enabling free transfers between some unconnected stations. That scenario might not threaten many people, but truly effective offline tracking that records real-world movements from purchase to purchase, the way web cookies chart our link paths from site to site, would be creepier and more seriously intrusive. As always with privacy battles, government and law enforcement agencies would argue for the broad social advantages of exposing crime, while individuals and privacy groups would counter with the right to spend money anonymously. Whatever the disadvantages of cash, it is anonymous. Cash is hacker currency.

True value

There is no question that for people above a certain economic stratum, virtual money is convenient. Convenience is the leading consumer value. There is a business advantage, too, if you put aside the fees. For merchants currently off the cashless grid, getting into the system can act as a stimulus; some estimates put total lost revenue to small businesses which don't accept credit cards at $100 billion.

And on the consumer side, what of the millions of people off the credit grid? The irony of cashless money, as my homeless companion would attest, is that its quickest adopters are people with the most cash. If there is one characteristic of digital money that idealists might hope for, it is that it would lift everyone's boat. I wonder how much revenue stimulus a homeless fellow would receive in a world where an inconspicuous smartphone gesture could deposit a dollar in his digital bucket. That's the kind of sci-fi future I want to live in.


Brad Hill is the former VP, Audience Development at AOL, and the former Director and General Manager of Weblogs, Inc.