Is P2P Square’s Killer App?

Welcome to PYMNTS.com’s VC Voices: a weekly column where we bring you commentary from the best of the best around the world of payments investment. Want to know what the biggest backers of our industry’s innovators and disrupters think? We give our VCs 500 words of unedited space to do with as they please, so you’ve come to the right place.

This week, we’re joined by Matt Witheiler, principal at Flybridge Capital Partners, who gives us his take on Square’s new product that aims to upend the P2P landscape. 

By Matt Witheiler, Principal, Flybridge Capital Partners

Fresh on the heals of PayPal’s acquisition of Braintree (and Venmo along with it), the long anticipated PayPal-killer from Square finally launched this week: Square Cash. Rumored for months now, Square Cash is pretty much exactly what people expected – a super easy way to transfer money from person to person. No fees. No complicated ACH deposit checks. No two-step funding process. Just cash from your Visa or Mastercard branded debit card to someone else’s. And not launched at the leading event for industry professionals focused on professional (Money2020), but on a random Tuesday evening. Boom.

While the mechanics of the system and fees appear to be pretty straightforward, the business model behind it isn’t so much. Like the other P2P money transfer services, Square faces fees when moving money through the established payment networks. Riding on the debit rails helps – fees there are much lower than those of the credit rails – but figure something like $0.10 for the card not present debit transactions that Square facilities. On an individual transaction, not so bad, but in aggregate across potentially millions of transfers a month and it quickly gets expensive to Square but remains free to you. So what gives?

Hard to say at this point. Square claims they are going to charge for additional services – things like sending money internationally (which they’ll have to pay more for anyway) or maybe a way to raise the $2,500 monthly limit. That may be the short-term answer but Jack* isn’t dumb and there is bound to be a way to bring down costs over time.

Two methods that Square may use:  

Closed Loop – It may be that the initial Square Cash product is designed to get consumers comfortable with the behavior and get users on board. After that, one could imagine a world where Square turns the P2P network into a closed loop where money is “deposited” with Square for use across their network, be it retail or P2P. One $0.10 for a large transaction is infinitely better than multiple $0.10 fees for small transactions.

ACH – The Square Cash solution is more elegant than PayPal in part because they’re not pushing you towards ACH. Not yet at least. ACH as an exchange mechanism would be significantly less expensive than the debit network and if implemented in a consumer-friendly way it may be the way Square makes this cheap for them.

Needless to say, the world of P2P payments just changed. Whenever a company that has raised almost $350M moves into your space they are bound to change things, especially when they’re a company as in touch with consumers as Square.

Frankly, if I were a new startup in the space I’d be pretty nervous – differentiating just became harder – and if I were a payment network or bank, I’d be hitting myself on the head for not being able to get out of my own way and build something like this myself.

To see a full demo of Square Cash, click here. 

*Dorsey, it goes without saying