Square is mothballing its Wallet app and card reader system, which launched in 2011 but never turned a profit. This raises more question marks over the level of demand for digital wallets, which have been heavily pushed by operators and web players, and which few brands may succeed in luring consumers.
Existing users will still be able to make and receive payments with the service, but it will not be available to new customers through the iOS or Android app stores any more.
Wallet was designed to let users pay at tills using their smartphones, but has been pulled due to a failure to catch on among consumers. It was adopted by Starbucks but this major endorsement was not enough to secure the app at the center of retail commerce. Wallet’s failure demonstrates the problems that face all m-payment entrants: a fractured app ecosystem, lots of competition, but most significant of all, poor consumer response and uptake of m-payment systems.
Square promised to revolutionize the way that small businesses could take payments. When a merchant signed up to Wallet, they received a small reader device that plugged into the headphone jack of an iPhone or iPad running the free Wallet app. This allowed the merchant to swipe a customer credit card without having to buy the larger and more expensive retail systems that are required for swiping credit cards. Wallet would also secure the payment by storing the customer details in the cloud, so that the device would not compromise security if lost or stolen.
Square is replacing the Wallet system with its Order app, which will let users order food ahead of time and then collect it without queuing. PayPal has a similar system in place with the Jamba Juice chain, and the delivery and takeout apps Grub Hub and Seamless also allow customers to pay for and collect orders inside the app. So Order is not the potential disruptive game-changer that Wallet hoped to be. This is a copycat product that Square hopes will stabilize its cashflows.
But a new system that can offer additional benefits to the consumer that cash or credit do not might be popular among customers. The ability to be told when to arrive and then cut a line with a simple app has huge potential if it is adopted by enough retailers ‘ although the same was said of Wallet.
San Francisco and New York are the two initial launch markets, with Whole Foods Market participating in the launch for the former and Square looking for consumer suggestions for appropriate local businesses in the latter. The app only lists a few businesses that customers can use Order with currently, but the company hopes to add more to the list. The transaction cost is far higher for businesses using Order than the fee Square charges for a regular card payment (8% vs. 2.75%) but it hopes that Order’s in-app advertising, loyalty programs and promotions will appeal to businesses as a suitable tradeoff for the higher price per transaction. The new customers that Order brings should justify the increased cut taken by Square, or so it hopes.
Square depends on large volumes of transactions to turn a profit, as the thin margins per transaction (<1%) meant that high volumes of trades were the only way Square was ever going to turn Wallet into a successful product. As the company is scrapping the system, it is safe to assume that the project has been bleeding money ' something that CEO and Twitter founder Jack Dorsey has already admitted when he was deflecting rumors of a cash crisis and possible IPO last month. But it is easy enough to see why m-payment systems like Wallet have not taken off when you look at Forbes' reporter Steve Bertoni's experience with trying to go mobile-only for a month, leaving his wallet at home and depending on an iPhone to pay for his transactions. His experience in New York found that only 'a handful of random pizza joints and a few eyebrow threading places accepted Wallet, and my local coffee shop stopped quickly after they found that no one was tipping the baristas.' When he did find a coffee shop that would accept Wallet, the teller said he was the second person to ever use the system. While anecdotal, Bertoni's experience does highlight the problems that Wallet faced but could never overcome. Small niche businesses do not make up the enough of the average consumer's retail experience to encourage mass adoption. As Wallet didn't incentivize customers it didn't do anything to change consumer behavior. Consequently, those who couldn't pay by card at their favorite small business would continue to pay by cash, happy to use Wallet if it was available, and continuing to use cards at larger businesses ' which would be mad not to already have a credit card system in place. But there are large gaps in the consumer marketplace and lifestyle that mobile payments of any kind have not penetrated yet, and where the benefits of instantaneous and secure payments are obvious. While they are capable for the flexible customer buying looking for coffee and sandwiches, you would struggle to find a local business to buy groceries at using a phone. There are almost no public transport systems that accept m-payment, and the same can be said of other non-perishable items such as clothes and media. Yet there is no practical reason why these businesses can't use m-payment. There just hasn't been enough pull from the consumer to push shops into supporting it. Evidently, the shoe still fits comfortably, and there's not enough incentive to change it. But m-payment is an area that is growing quickly. Alibaba is the biggest m-payment player in the world, processing over $150bn in mobile transactions in 2013, amounting to 2.78bn transactions via 100m registered Alipay Wallet users. Alibaba estimates that PayPal and Square processed around $50bn of m-payments between them in the same year. PayPal reports that it processed $27bn in 2013, so Square is certainly handling a lot of money if the Alibaba estimate is correct. Alibaba is definitely eyeing a global expansion of its products, and Alipay may soon be a rival presence in the US market for the likes of Square and PayPal.