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'Square' iPhone Credit-Card Reader to Change the Banking Game?

square reader

Twitter co-founder Jack Dorsey just flicked on the public spotlight over his new venture: Square. It's a tiny plastic blob that gives smartphones the ability to act as secure credit card readers. It's clever, disruptive, but will have to evolve very rapidly.

Square was born extremely rapidly: It began as an idea in February 2009, and the new company came out of stealth mode just yesterday—that's a window of just ten months, which is swift even though the idea behind the device is extremely simple. Essentially it's a small piece of electronics that translates the signals from a magnetic strip reader into an audio signal. This audio signal, corresponding to the data on a credit card swiped through the device, goes in through the headphone/microphone socket of an iPhone, where it's decoded by the special Square app and wirelessly routed off to Square's remote servers which then perform the usual banking jiggerypokery that more ordinary credit card readers do.

So far, so simple-sounding humdrum, right? Well, it's more complex than that of course. By providing a basic, easy-to-use and secure system (no credit card data is stored on the iPhone in use) Square could turn almost anyone into a credit-card accepting merchant. It also costs way less than the typical wireless keypad/printer card machines you see in stores, even factoring in the price of the iPhone—partly due to its "no hidden costs" promise. And ultimately it'll be able to work with other smartphones and laptops—anything with a microphone input, and for which a Square app can be written. Over at GigaOm they're calling a disruptive technology because of the ubiquity of smartphones, and the possibility Square could overturn the way traditional e-banking transactions are carried out.

card chipAnd that's probably true...with one huge "but." It's to do with Europe. European banking and credit card systems are very rapidly switching away from magnetic strip technology towards the smarter, more secure in-card chip tech. The change is so swift that U.S. visitors are often finding their old-fashioned magnetic cards aren't accepted in many establishments, and it's such a vastly superior system that there are even mumblings that the E.U. may ban magnetic bank cards pretty soon. This will pose a significant problem for Square, which relies on the low cost of its hardware components and fancy in-smartphone processing to work. For Square to disrupt the European electronic banking system, it will need a newer, more expensive piece of hardware that can interface and decode the in-card chips directly—this will complicate its business model pretty severely. And there's another problem: Europeans in many nations are already used to using wireless credit card readers for almost every transaction—I bought a single carton of milk in my tiny local store using the system this morning. Square will have to fight cleverly in a battle dominated by the big, muscly banks if it's to be a disruptive influence over the Atlantic.

Still, since Square went from concept to product so swiftly, it should be possible for Dorsey's system to evolve with nimble speed to cope with this issue, don't you think?

[Square via GigaOm]