Analyzing Square Cash

Square Cash

Square, Jack Dorsey’s company made famous for allowing small businesses to accept credit card payments on their phones via small square-shaped white dongles, has recently launched a consumer person-to-person payment offering (see http://econ.st/1a7rLLD). Square Cash allows users to send money to friends by simply sending them an email. As shown above, a user simply sends an email to the intended recipient (in the ‘TO:’ line) while CC’ing cash@square.com and including the amount in the subject line. This process is the same whether you’re using the service for the first time or if you’ve made hundreds of transfers. There is no mandatory app to download (although you can choose to use their iOS or android apps if preferred) and the signup process is remarkably simple.

Once you send your first email, you receive a confirmation email like the one below from Square asking you to link a debit card.

If you click on the widget to link a debit card, you’re directed to a webpage like the one below which simply requires your debit card information as well as a confirmation button to send the money. Once you link your debit card and click send $5, the money is sent and your debit card is stored.

From the receiver side, there is a notification sent when the initial email is sent that notifies the receiver that money is coming (see below) as well as a follow-up confirmation email once the money has actually been sent asking the receiver to link their debit card to collect the funds.

The entire signup process took less than 2 minutes (including the time waiting for the email from Square to link my card). As a former Payments Product Manager for a competing firm in Silicon Valley, and a [likely former] user of Chase QuickPay, PayPal and Venmo, I must say this product is awesome. In my opinion this product is better than any other person-to-person money movement offering out there right now*. Here’s why:

*Gmail has announced a similar feature that is currently available to Google Wallet customers but should be made available to all U.S. Gmail customers eventually. I haven’t had the opportunity to test this offering yet, but based on videos it appears to be very similar and should exhibit many of the same benefits below. Since it is initially based on Google Wallet balances, my guess is the payment settlement time will also be faster than PayPal and others but that the initial set up of a funding account may be more time consuming than Square's. It is hard to tell if account funding is card-based or ACH-based, but depending on which it is will dramatically affect the timing and cost of settlement. In the absence of information, I have excluded Google from this comparison.

What makes Square better than existing players?

• The first use experience of Square Cash is perhaps only matched by Venmo. It is remarkably simple, requires very little data entry, it does not require the creation of an account and best of all I don’t need to download a new app. The ability to pay other people is embedded in an activity that I already perform very regularly.
• By leveraging the debit-networks, as opposed to ACH (PayPal, Venmo, QuickPay, Dwolla, PopMoney and others), Square is able to settle the transactions much faster – meaning as an end user I get my money in a day (or potentially even same day) as opposed to in 3-5 days for the ACH-based services (where it is pulling from your bank account). Technically, the payments could settle nearly instantaneously, but given risk controls Square will likely delay settlement for up to a day.
• People feel more comfortable providing their card numbers online than bank account details – it is also a lot easier to find. When was the last time you used a check? Well, that’s how Chase recommends you locate your routing number and checking account number when you are asked to add a funding account (you can also get this via online banking, but with masked account numbers this can also be an adventure). Overall people are generally more familiar and comfortable providing card-based details online than providing their bank account details.
• The receiver payment acceptance workflow is just as easy as it is for the sender. If you’ve received a PayPal payment or Chase QuickPay for the first time, the sign up process can take several days and requires a lot of information. Both processes require email confirmation, phone number for Multi Factor Authentication (MFA) and the entry of bank account details, which may include providing your online banking login and password. In comparison, Square Cash requires the entry of exactly 25 characters (16 for Debit Card, 4 for MM/YY and 5 for Zip).

Where might Square struggle?

• Other players have used the ACH network as opposed to the debit networks for a reason – it is CHEAP! Much cheaper than sending transactions over the debit card network. The cost of settling an average ACH transaction is typically well under $0.10/transaction. Depending on economies of scale and partners selected, this can vary but most players can settle push transactions for $.05-$.10. In contrast, Debit network settlement can easily cost more than $0.35/transaction. With Square providing this service for free (at least for now), it could be an expensive loss leading offering.
• Square’s value proposition has resonated well with small businesses looking to accept credit cards without having to sign onerous merchant contracts. On the consumer side though, there are a lot of competing P2P offerings that could make it hard for Square to rise above the noise and gain traction. The first use experience for Square Cash is remarkable, but unfortunately without the app sitting on your phone’s screen there isn’t much of a reminder to use the service if you are already comfortable with PayPal or others.
• If Google is able to launch a similarly simple workflow that is competitive on settlement time and price, attaching payment to Gmail is probably more likely to mass gain consumer acceptance based on its huge existing user base.

Angel List – VC Friend or Foe?

Much has been made of the emergence of crowd funding sites such as AngelList, Kickstarter and other competitors. According to many, they are dramatically changing the VC industry. When asked about the impact that crowd funding sites will have on the industry, VC’s have seemingly fallen into two buckets. The growing first group acknowledges the challenges that these companies are introducing and they thoughtfully discuss how they are trying to carve out their own market niche. The second, with a slight tremble in their voice, deny that crowd funding sites will really have all that much impact and that it is a passing fad. In this post, I am not going to argue that crowd funding sites will not impact the VC industry (because I believe that they have already begun to) but rather that the impact will not necessarily be negative.

Before arguing that sites such as AngelList may actually benefit VC’s, let’s start with some of the biggest challenges that they are creating. Most concerning is the reduction of barriers to entry for new investors to combine with other passive investors and create pseudo-VCs through deal syndication. With easy access to once proprietary deal flow, any interested investor with some time on their hands and access to (not that much) capital can set up a simple Mom and Pop 20% carry shop. When you consider that many of these syndicates do not (or are not able to) charge fees, there is a very real threat of price competition for traditional VC’s (why pay 2% fees when another syndicate doesn’t charge them?). When we consider the additional risks of ‘capital commoditization’, entrepreneurs raising at lower valuations due to more competition and a preference among some for ‘no strings attached’ capital, we understand why many in the industry are starting to sweat.

Despite these challenges, AngelList and other crowd funding sites provide several distinct advantages to VC’s that may enable them to thrive, albeit in a slightly different way.

·      Crowd funding has enabled Venture to appeal to the common investor
Distrust for Wall Street is at an all-time high and investors are tired of playing a rigged game. With two market crashes in the last 15 years that were “once in 10,000 year events” (see Nassim Nicolas Taleb’s Black Swan), everyday investors are tired of Wall Street getting rich while their investment portfolio continues to fall. There is an increasing group of high net worth investors in the baby boomer generation who enjoy the excitement of actively or semi-actively managing their portfolio, but recognize the cards are stacked against them in the stock market. AngelList has become an attractive option for some of these investors because it allows them to do some of their own research and pick specific investments that they can watch grow. The problem is…

·      …AngelList has revealed how hard it can be to manage deal flow
Yes, AngelList has lowered the barrier to entry by giving wide reaching access to deal flow. The problem for many angel or personal investors is that this can be overwhelming. With hundreds, if not thousands of companies currently listed on AngelList, how does an uninformed investor effectively screen through these companies and perform adequate diligence? One could take the Ron Conway planting many seeds approach, but the low barriers to entry have also led to a lot of bad companies making it onto AngelList. The low barriers to entry are both a blessing and a curse for unsophisticated investors – it will become increasingly difficult for individuals to sift through the countless opportunities (on AngelList at least) to find the meaningful ones.

·      Crowd funding platforms allow VC’s to syndicate more easily
While crowd funding platforms enable angels and common investors to syndicate their investments more easily, it is also making this easier (and more broadly available) for VC’s. Deal syndication between Angel groups and VC’s (or between VC firms) previously relied on strong relationships, experience working together or an introduction from a mutually respected party. Crowd funding platforms enable established and well respected VCs to syndicate on deals together without having to have any connection beyond on a common interest in the company.
 

·      Fund performance and reputation becomes more public, faster
Rather than waiting for the next NVCA publication to come out detailing the performance of the top and bottom quartile funds, crowd funding sites can provide real-time feedback on investing returns by tracking momentum. Investments are deemed to be ‘good’ if more investors pile into that company after you’ve put your money in, and bad if the reverse happens. Each investor is given a rating based on the success of their past investments, which is made public to other members. Crowd funding sites have the opportunity to serve as the ultimate venture meritocracy with funds flowing into new syndications based on past performance. Individuals make the ad hoc investment decision given the firm’s historical returns and rating. Over time, the truly ‘good’ investors will be able to make a name for themselves via superior performance. In turn, this will lead to…

·      …Anytime Fundraising
Rather than managing an exclusively closed-end fund that requires months or even years to fully subscribe, VC’s are able to mimic open-end characteristics through syndication. By syndicating single deals, pools of deals or a full portfolio, VC’s can open themselves to additional capital and earn carry on funds that otherwise would not have been available to them. By establishing a successful investment track record, VC’s can attract additional investment for future deal syndication. In the past, LP funds couldn’t be redistributed until after the life of the fund (10-12 years). In the crowd funding model, investor funds are shuffled and redistributed on a deal by deal basis and so reputation impacts fundraising even more than it would in the normal course of business.

With all of these changes, what does the future of VC look like? No one can be certain, but FunderClub seems to have a pretty good start on things. Open only to accredited investors, FundersClub filters through the wide array of possible investments in their deal flow to present only the highest quality options to their members (roughly one per month). Individual investors still make the ultimate yes/no decision on the investment, but FundersClub is committed to providing ultra-high quality deal flow to personal investors and often partners with other well-known VC firms on their deals. This type of model leverages the low barriers to entry that AngelList helped make popular with the investment selection rigor honed by VC’s over the past several decades. Only time will tell how the industry will continue to evolve, but in an industry that has thrived on the innovation of others for the last 30 years, it is amazing how nervous everyone is about a little change.