The Saga of Square: How Square is using rapid customer onboarding to disrupt the payments industry.

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1 The Saga of Square: How Square is using rapid customer onboarding to disrupt the payments industry.

2 Square has become as much known for its industrial design as for its dead-simple digital services Smarter on-boarding: the key to higher client retention and cross-sell Accenture Its secret sauce has been ridding pain points from the traditional process merchants had to endure to begin accepting payments at their businesses - Fast Company These trials have proved that automating end-to-end processes, which used to take 12 to 18 months or more, is doable in 6 months with half the investment typically required. McKinsey Quarterly

3 Who this book is for & information about the author Who this book is for: The author This ebook is for leaders of merchant card services firms who wish to understand how Square and other micro merchant processors are changing their industry. After reading this ebook you will understand how rapid customer onboarding is a key element of Square s disruption, why the disruption is important, how onboarding processes can be developed into a competitive advantage for your company, and how to show the rest of your organization the value of investing in customer onboarding. Peter Fitzpatrick is an Account Executive at Recombo with extensive experience in the electronic payments space where he worked for Canada s fastest growing payment processing ISO. Peter studied Commerce at the University of British Columbia and is responsible for publishing Recombo s ideas and lessons from our rapid customer onboarding process reengineering practice, as well as the experiences of others in the industry.

4 Agreement Express Table of contents: Agreement Express is a rapid customer onboarding platform for financial services firms. Easy to implement We implemented a pilot onboarding automation project with a global payments acquirer in only 16 weeks Future Proof Agreement Express is expandable, and it s flexible, so you can integrate it into future IT initiatives David the Disruptor Oops, we meant Square Watch out Goliath! Why payment processors shouldn t take Square s success lightly Customer onboarding can help payment processors build a competitive advantage Tired of losing merchants to slow application timeframes? How to show your manager the importance of rapid customer onboarding Comprehensive Agreement Express works with your legacy systems to keep information up-to-date. And, as a constantly evolving platform, it will be upgraded to work with future IT systems

5 What makes Square different? Square is fast, easy, and mobile. The first thing new customers of Square notice is that it only takes 15 minutes to get set up with an account. Compared to traditional payment processors, which take up to two weeks to onboard a new customer, it s often a WOW moment. Signing up with Square can be done over the internet and requires only a few account verifying questions. Signing up at a bank would typically require filling out over 5 full pages of paper documents. Finally, Square s card reader transmits information over mobile devices, which means payments can be processed almost anywhere and with little fixed cost. Comparatively, most competitors devices are tied to phone lines or internet access. And those that do take advantage of the mobile network cost up to $80 a month to rent. 1. David the Disruptor Oops, we meant Square Square is disrupting the payment processing industry. Only a three-year-old payment processing startup, they now process more than $10 billion worth of transactions annually, which has got the payment processing industry asking how was Square able to accomplish so much in so little time?. Not to mention Square s exclusive deal with Starbucks that will use Square payment processing technology in every one of Starbuck s 7000 US locations. Square has innovative business processes How does Square accomplish this? The key lies with Square s ability to deliver a superior user experience through agile business processes. By rethinking the purpose behind paper forms, and taking advantage of technology, Square is able to create a much faster and simpler customer on-boarding experience. With today s technology, information gathering is made easier through automation. Merchants love Square because instead of spending their valuable time filling out tedious (and often redundant) forms, well designed onboarding processes and smart process software do much of the legwork. In a Merchant s eyes Square is demonstrating that they care about their customers time, and at the same time, casts a shadow on their competitors business processes. Merchants care about customer experience The deal between Square and Starbucks is not only a major milestone for Square, but also a statement of where the payment processing industry is going. Merchants and their customers care about experience. Within any sales process, the most crucial step is always closing the deal, and the payment process is an integral part of that step. By partnering with Square Starbucks is incorporating Square s agile business processes into their business. Seamless merchant onboarding is becoming more and more important, as mobile payment processing is becoming an expected standard. Payment processing service providers who fail to impress customers with their application and setup process will signal to their customers that they are falling behind in general. And if that happens, they are likely to fail to remain competitive in this evolving industry.

6 2. Watch out Goliath! Why payment processors shouldn t take Square s success lightly This should serve as a cautionary tale for payment processors who are slow to respond to the rapid success of Square. Companies that fail to innovate and adapt eventually lose their market position, but usually not immediately. In order for the disrupter to earn the credibility to compete with the incumbent firms, the challenger often first establishes themselves with the long-tail customers those that the incumbent companies do not care about or cannot reach themselves. And that is exactly what Square is doing. Industry disruptors are enabled by their competition. They succeed because the industry leaders stand still as disrupters grow. Large companies with well-established ways of doing business often do not have the foresight to recognize which trends are fads and which will reinvent their industry. This could be the case today with Square in the payment processing industry. But how can payment processors, acquirers, and super ISO s figure it out? They can start by learning lessons from other industries. The home movie rentals industry recently went through a significant disruption: movies can now be delivered over the internet instead of through retail outlets and played on computers or mobile devices instead of DVD players. Blockbuster, a well-established leader in an industry with huge barriers to entry, has since gone bankrupt. How did Blockbuster, which in 2004 had 60,000 employees and nearly 20 years of industry experience, lose its competitive edge to Netflix and find themselves at the point of bankruptcy? In hindsight we can take a look at how Blockbuster should have responded to Netflix and give an example of how payment processors and super ISO s should be thinking in regards to Square today. Like Square, Netflix began trying to solve a problem with the existing system the annoying problem of late fees. In 1999, Netflix introduced its signature flat-fee unlimited rentals business model that began to revolutionize the movie rental industry. Their success was not immediate, but gradual. Management at Blockbuster had ample time to formulate a response. What they should have done was to cut its fixed cost by reducing the number of stores, and introduce their own unlimited rental plan. But the actions they took were too little, too late. By 2010, Blockbuster filed for bankruptcy. Square is currently successful at fulfilling the needs of the long-tail customers, a segment that larger banks can not reach with their existing technology. Long-tail customers are the farmers market merchants, food truck vendors, and other small business that typically operate on a cash basis. In this space, Square (and other micro-merchant payment processors) has little competition from established firms because they are the only company with a cost base low enough to profit serving such low volume customers. Square fills a need for payment processing that is currently being filled by cash or, occasionally, checks. The bigger payment processing service providers should take notice, even if they are not yet directly competing with Square. By monopolizing the long-tail customer segment, Square will be able to establish a foothold in the industry and eventually pick up enough momentum to challenge the status quo. And they ll do it with a much lower cost base. Think about Blockbuster trying to build their own mail order or streaming movie service in No matter how much money they had to throw at the problem, it was too late. In fact, Square has already taken the next steps to become a major player by signing an exclusive deal with Starbucks. This is a sign for payment processors, acquirers, and super ISOs to take notice of. They must realize that Square already offers a better customer experience to small merchants and is quickly expanding their customer base upwards. Established business processes are slow and outdated, and need to be reengineered. The days of two-week long customer onboarding periods are over; customers today are demanding what Square is offering: onboarding in 15 minutes. Competing with Square with a feature list is not enough because they will gain feature parity. You must beat them at their own game, or they will beat you at yours.

7 Customer onboarding can help develop a competitive advantage It s simple: they provide a better customer experience. But that s easier said than done. So how can payment processors deliver a better customer experience? They develop better business processes. Payment processors that have better business processes can conduct business faster than their competitors and offer their customers a better experience at a lower cost. In other words, they ve developed a competitive advantage. 3. Customer onboarding can help payment processors build a competitive advantage Getting merchants to switch payment processing providers is not an easy task. Business owners today are more tech-savvy and well-informed than ever before, and they need to be convinced that switching will create value for their business. A good sales pitch is not enough. With new internet applications like CardFellow at their finger tips, and with the current trend of micro-merchant payment processors displaying flat rates on their website, they can easily find out the rates offered by different banks. Competing on rates is risky because it hurts profitability and may lead to a margin-slimming price war. So how can banks attract new merchants without lowering their rates? A clear opportunity to improve customer experience is to automate the customer onboarding process because it s the first experience a new customer has as a customer. Onboarding is a crucial part of a customers experience because it sets their impression for the future. It reaffirms the choice they made to switch is the correct one, and frames future interactions favorably. A negative onboarding experience creates the opposite. It makes the customer question why she went through the hassles of switching in the first place, and risks losing the customer by the time the trial period ends. This situation is even more important when attempting to upsell current customers. If you re onboarding process wasn t pleasant the first time, they will think about a competitor for their next account. A better customer onboarding process decreases a customer s likelihood of switching to a competitor. Let s take a look at Square, the payment processor that we think has the best customer experience in client onboarding. Square charges much higher transaction rate than their competition. Their rate is 2.75%, whereas the industry standard is around 1.75%. But this three-year-old company rocketed to processing $10 billion in transaction annually. Part of the allure of Square is that they have a simple, fast onboarding process. Their onboarding process involves a quick registration form on their website that takes approximately fifteen minutes. Onboarding at most leading processors typically required five pages of paper or PDF forms, and takes five days to complete. Square has a much easier time convincing merchants to try their services with such a quick and simple onboarding process. Payment processors must recognize the necessity for creating better customer onboarding process today. Merchants expectations for client onboarding quickly follow the industry best practice. Square raised the bar in what client onboarding should look like. Banks that react quickly can gain a competitive advantage over those who lag behind.

8 If you work in sales and marketing in the payment processing industry, chances are you ve already heard of the recent success of Square. You have likely noticed that your customers are beginning to demand the signup experience Square offers. They want to be able to sign up for an account in minutes and start accepting payments immediately. And if you re like the companies we speak to every day, you re probably tired of explaining why your company can t offer the same quick service, before going through the reasons why your product is truly much better. It s frustrating to lose to an inferior product because of a slower customer onboarding timeframe. But what if you could be as fast as Square? 4. Tired of losing merchants to slow application timeframes? How to show your manager the importance of rapid customer onboarding The key to persuading most managers to the importance of rapid customer onboarding is establishing that it makes financial sense. Which it does. By reengineering the business processes behind customer onboarding, banks can improve their profitability and offer more value to their customers. It s a win-win situation for both parties. And, with the SaaS smart process applications available today, the amount of time and effort required to automate the onboarding process is manageable in as little as a few months. Automated customer onboarding means a shorter onboarding period, which allows revenue generation to start earlier. The typical two weeks between signing up and approval is usually not viewed as revenue lost, but it makes sense to think of it that way. During the onboarding time period your new merchants are processing payments through another processor instead of yours. So as you can see, shortening the customer onboarding period results in more revenue. What could two extra weeks of processing revenue from each merchant amount to in a year? A study conducted by the Oliver Wyman Group reported that 75% of banks estimate that automated onboarding will lead to revenue increase per client of about 10-30%. In addition, streamlining the business processes behind customer onboarding reduces its cost. Rapid customer onboarding automates much of what employees currently do, reducing the number of people needed to onboard new customers. 58% of the banks in the Oliver Wyman study believe automation would lead to cost reductions of between 10-30% for customer onboarding.

9 USA - Sales & Service 1133 Melville Street, Suite 730 Vancouver, BC, V6E 4E UK -Sales & Service Pembridge Crescent, London, W11 3DS Support & Training [email protected] There are strong financial incentives for banks to automate their onboarding process. Square is a clear example of a payment processor that has automated their customer onboarding with success. The question executives at banks should ask themselves is not, Why should I automate my onboarding process? but rather, Why haven t I automated my onboarding process already? [email protected]