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I fully agree that the ISOs that “rip & run” their merchants have got to go. I was hoping that Square’s James McKelvey actually believed that as well.
May 2
Poor service from an ISO helped convince James McKelvey to co-found Square Inc., the exec told attendees of the 23rd annual Card Forum and Expo co-sponsored by ISO&Agent sister publications PaymentsSource and the American Banker in Miami Beach, Fla.
And as payments-industry competition mounts and pressure to cut interchange fees increases, ISOs should reinvent their roles in the payments chain by becoming more helpful to merchants, McKelvey said during a roundtable discussion on the future of commerce.
In his previous experience as a small-business owner, McKelvey said, he experienced great frustration in dealing with ISOs and with the complexities of merchant services, fees and interchange, which led him to realize there was a big opportunity to improve merchant services.
That epiphany prompted McKelvey to help found Square, the start-up company that enables merchants to accept card payments through a small, square-shaped device that plugs into smartphones.
McKelvey soon realized providing merchants with new payments options “was a very fruitful area to work in,” he said.
In an interview after the presentation, McKelvey said the ISOs he dealt with as a small-business owner “were depending on the fact that we were ignorant” about fees, costs and interchange rates in order to make profits.
“Square decided to target that market, where we saw that lots of people were taking advantage of that ignorance, and payments was an area where small-business owners needed a new approach,” McKelvey said. “One of the things we’re trying to do at Square is to simplify the payments experience so merchants will have one rate. They’ll know exactly what it’s going to cost -- no questions.”
Asked what role ISOs may play in the future of payments, McKelvey said ISOs ought to be “informational and service-oriented,” but he warned that ISOs that prey on “the confusion and complexity of different merchant rates and the 42-page documents that go along with interchange” will not have a long future.
“The parts of the [ISO] business model that prey on merchants’ ignorance are going to go away much faster than anyone anticipated,” McKelvey said.
Visa announced in late April that it had made an undisclosed investment in Square, a move that will bring Square other benefits as well, according to one analyst.
Square is now positioned to participate in the mobile payments pilot tests, trials and rollouts that Visa drives, says Gil Luria, a research analyst at Wedbush Securities Inc., a Los Angeles-based equity research firm.
“Visa doesn’t mess around,” says Luria. “If visa wants to facilitate the move to this type of acceptance, that puts Square in a much better position than all the rest of the pack.”
Visa has much to gain from the right partners, he notes.
"Facilitating mobile payments is a major focus for visa because a lot of their competitive threat comes from the shift to mobile payments," Luria says.
McKelvey founded Square with Jack Dorsey, who made a name for himself by starting San Francisco-based Twitter Inc., the social-networking site.
Square announced earlier this week that its reader is becoming available through Apple Inc. stores and on the Apple website.
Square offers its reader at no charge. Though Apple is charging $9.95, users receive a $10 refund once they activate their account, according to published reports.
The Apple site describes Square as “a revolutionary service that allows you to accept credit cards, using a reader that plugs into your iPod touch (4th generation), iPhone 4, or iPad along with a free easy-to-use app.”
“There's no need for complicated contracts, monthly fees or merchant accounts,” the Apple site says. “All you pay is 2.75% per transaction.”
