Apple made Square: Democratization of payments

The democratization of access to payment processing is being driven in large part by an affordable, well-distributed hardware system that could run the payments processing effectively-- the iPhone/iPad. In order to keep investment costs low for vendors, the variable cost for a payment processing system had to be low, or close to zero. Software, especially through venues like the Apple “App Store,” has a marginal cost of zero because it can be easily copied and sold- all with just the initial investment cost. The iPhone and iPad, as well as accompanying App Stores, created a platform technology, whereby many merchants would already have iPads, and if not, the cost of obtaining one would be low, and discounted by its multi-purpose nature. Instead of having specialized hardware just for processing payments, which has to be manufactured, shipped, and installed in merchant locations, the Apple platform enabled an almost purely software solution to the payments problem. The only lacking feature in the hardware is a sensor to read the credit card, but this cost is marginal compared to the overall cost of typical card processing hardware. By making initial investment costs zero (the sensor cost is so low that it could be given away,) barriers to entry for small merchants are significantly lowered.

        Traditional payments processing companies had little competition because of the massive capital required to create the necessary partnerships and hardware. Since merchants depended on their product, payment processing companies like Hypercom had little incentive to improve or upgrade these POS terminals. This created an opportunity for startups that had everything to gain by providing a superior product. A pre-existing app and device ecosystem put in place most of the hardware, and the majority of the distribution channel (apart from a credit card sensor,) enabling a startup to focus on improving user experience, and making payments fun and innovative. This would put such products at a significant advantage with an increasingly tech-driven population. By enabling a new startup to focus on software product, and user experience, and especially reduction of initial investment, the app ecosystem allowed for massive payments democratization.

This is an incredibly disruptive trend because no longer are potential merchants constrained by the cost of entering into business- the beauty of democratization is that now, anyone can be a merchant. Barriers to entry on all consumer-facing businesses are significantly lowered by changing payments processing from an asset to a rent- merchants can simply pay for what they make, or pay a fixed cost monthly. Thanks to payments democratization, all consumer-facing industries will increase in competitiveness because small vendors can afford to go into business, making skill and quality of product more important than startup capital. While there are still significant barriers to entry for small vendors, payments, one of the most crucial aspects of any business, has started to become significantly more democratic. I think we can all appreciate that.