Square: An Innovation Case Study

As an innovation specialist, you’re probably frequently asked to name an innovative company. Don’t hesitate for a moment, there is one irrefutable answer: It’s Square — the company that has brought disruptive innovation to the credit-card processing market.

On Monday, I was called by Contra Costa Times’ George Avalos to comment on Square’s announcement that it would double its San Francisco office space, which would allow it to hire as many as 1,000 workers by yearend 2013.

As I told Avalos, the reason why this startup is so successful is that Square has removed “a real point of pain and inconvenience for merchants.” This is what innovators like to call “disruptive innovation.”

Square readerSquare has not only revolutionized the credit-card terminal business but even added a dash of designer glamour to the boring processing of credit-card transactions, as this Vivienne Tam edition Square reader shows.

What makes an innovation disruptive? Innovations that help create or grow new markets and value networks, and eventually go on to disrupt an existing market and value network, over a few years or decades, by displacing an earlier technology or process, are disruptive.

  • Disruptive technology – The $5 Square reader converts a credit card’s magnetic stripe into audio pulses, which are then transmitted via the iPhone’s headphone audio connector and cellular network to Square. That is a truly innovative approach.
  • Disruptive process – When I signed up for a Square account on Oct. 14, 2010, I became a credit-card accepting merchant within minutes. Contrast that experience to 2003 when I had to buy a $900 Nurit 8000 Wireless Credit Card Terminal, which required a separate $20-per-month subscription to the RIM network. Today, the Nurit 8000 still costs $250.
  • Disrupted value networks – To make my Nurit work, I had to apply for a merchant account with a separate bank, which required credit checks, activation fees and separate per-transaction and monthly minimum charges. Square eliminates all these annoyances and charges a low transaction fee, a benefit usually reserved for merchant accounts that process a high volume of transactions.
  • Expanded value networks – Square has made the credit-card terminal even glamorous. I own a beautiful Square reader designed by Vivienne Tam. Who else offers a designer credit-card terminal?

No wonder, Square has grown from $1 billion in payments processed annually to $8 billion. The company has closed a $200 million round of funding, which reportedly values the mobile payments company at $3.25 billion.

As Clayton Christensen mentioned in TechCrunch, “Disruptive innovations create jobs, efficiency innovations destroy them.” Sure enough, Square plans to add 600 new employees in the next few months. That’s innovation and job creation on crystal-clear display.