Square's big threat to the card networks

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Starbucks had a lot of partnership options when it decided to inject itself into the middle of the sweepstakes for the future of in-store payments. There were plenty of NFC-based entrants, such as ISIS and Google. There were also plenty of non-NFC entrants, some with huge brand names, like PayPal. The coffee retailer might also have chosen one of the card networks or even a bank. But in the end, it went with Square.

Fast Company concluded that the main reason is simple: "Square treats payments a lot like Starbucks treats coffee: By focusing on the experience around a product that is more or less a commodity."

It's true that the customer experience is critical. At the same, the financial incentives cannot be ignored. In some ways, Square, with its flat fee pricing, represents a profound challenge to the payments hegemony of the major card networks, with which most banks have aligned. Notes a contributor to TheStreet.com, "When scaled fully, this Square deal could be the biggest threat Visa and MasterCard have ever faced."

The goal appears to be to disintermediate the traditional card networks. Verifone, the big maker of traditional POS devices, has certainly felt the heat.

And what about banks? The reality is that they are increasingly seen as passive players, more interested in aligning themselves with the top wallets and preserving spots at the top of each stack. Square doesn't really change that.

Banks will receive the same interchange fees on the card registered in the Square app, from Square not the actual merchant. Let's assume that Square can make small transactions profitable. The real benefit may then be in the data they collect and share with retailers. Increasingly, the card issuers have to ponder the likelihood that they'll be relegated to the bottom of the value-add stack. If they cannot benefit from the data that results from all the marketing and sales via the mobile devices, they will truly be the big losers in all this. -Jim

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