The Bait-and-Switch aka How to Solve the Chicken-and-Egg Problem

Mobile payments is the classic chicken an egg problem.  How do you get vendors to support your service if people don’t have your app?  Why would people download your app if no one supports it?  This is one reason why many believe that mobile payment systems will be driven by large companies.  The main hurdle is market-based, not technology based.  However, let’s look at how Square is solving this problem.

It started with a simple idea that solved a real problem for a (relatively) small market.  Let businesses, too small or unsophisticated to accept credit cards, accept them using a smart phone and a free piece of hardware.  Fast-forward a billion dollars and they are doing $4M in transactions a day.  Sounds great, but now what?  I think you can do the math ($4M*2%*365 will not get them to the $10B valuation that will make KPCB happy).

Well, earlier this year, Square released Card Case, a (really well thought-out and executed) more conventional mobile payments solution.  Many of the merchants that supported square (especially those that used their point of sale system) have to do very little to now support Card Case.  Square does not have to spend time and money to convince them to invest resources in setting up a system relying on a startup which, frankly, could be gone in a year, because they have already done this to accept the Square device.  So now, when I sign up for Card Case, I see several merchants that already support Square, which means I might actually use it.  And Card Case is one step in the direction toward a capitalist-utopian future where we can buy things without having to lift a finger.  It also has the potential to greatly increase Square’s market because they now provide value to merchants who already accept credit cards.

What if Square had skipped straight to Card Case?  Well, then they would look like all of the other failed mobile payments systems, trying to solve both ends of the chicken/egg problem with a massive marketing campaign.  Not a cheap way to start a business.  This is not to say that Square has solved the problem.  They started with a small market and a small number of merchants, that gives them a small number of consumers to start with Card Case.  This will (hopefully) incentivize larger merchants to adopt the system, and therefore more consumers, and so-on.

Time will tell if this actually works.  But what I find interesting is that a company that many thought were addressing a niche market with a somewhat gimmicky device has suddenly created a very real presence in a very large and difficult market.  That is the bait-and-switch.

This entry was posted in Startups, Tech. Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s