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Startups Threaten Visa and Mastercard

You may have noticed a new trend among smaller retailers in your town: they’re foregoing traditional cash registers for iPads. Apart from making it quicker and easier for employees to ring up customers, these systems are increasingly making it possible for customers to pay using their smartphones by installing an app and paying over the Internet.

The leading startup offering this kind of service, Square, by itself doesn’t pose a threat to the Visa and Mastercard networks. Both of those are still ultimately being used by customers when they transfer money to merchants, and both are still eating into the merchants’ margins. When merchants use Square to accept payments, for example, they forfeit 2.75% of every transaction.

But, as Quartz reports, there are signs that Square might be joining forces with a less well-known (but potentially even more disruptive) startup called Dwolla. Dwolla has created a payment network which completely circumvents the traditional means of getting money from person A to person B, and in the process has managed to cut costs for merchants by orders of magnitude.

Putting the two together:

Square’s COO has predicted that a majority of retailers in the US will be using an iPad instead of a cash register within 18 months, and Square’s Register system runs on iPads. That improves the payment part. Then, Dwolla offers a way to transfer money for almost nothing. With Dwolla on board, Square could offer merchants transaction fees so low that they’d be foolish not to accept Dwolla as another form of payment alongside Visa and Mastercard. Finally, once Dwolla has banks extending credit on its network, the combination of Dwolla, Square and banks represent a legitimate alternative to existing credit cards.

If you’ve ever attempted to accept credit card payments yourself, you know that the system is needlessly complicated and ripe for innovative disruption. Will Visa and Mastercard be able to compete? If a journalist at a business publication sees the writing on the wall, surely someone inside those corporations has raised the alarm. We hope they at least try, as competition keeps everyone honest.

Regardless of how this plays out, it will be a win for consumers and a win for businesses, which just happens to wreak havoc on an inefficient middleman: exactly the kind of creative destruction that IT has brought to many other industries. More please.

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