Step 1 of 5 · 2009–12

Card acceptance in minutes for sellers banks turned away

Square's innovation was card acceptance that a very small seller could switch on in minutes, with a reader plugged into a phone and no merchant account, monthly fee or contract BLK-5 BLK-3. It went after sellers the card business had never served: babysitters, food trucks and flea-market vendors with no fixed location BLK-5. Sellers like these were not choosing between Square and a bank, because no bank had signed them up. Square put the number of US sellers still not taking cards at about 20 million in 2015 BLK-3. Serving that new demand let Square pass 1 million merchants before PayPal Here launched BLK-6.

The idea came from the customer's side of the counter. Co-founder Jim McKelvey ran a glass studio and lost a sale because he could not take an American Express card BLK-2. He says he chose a small, simple reader over a more reliable one because sellers who saw it were amazed BLK-2. By January 2011 about 50,000 small businesses a month were signing up BLK-5. Block still describes Square's start as letting businesses accept card payments, with point of sale, commerce and financial services added later BL1.

Rivals PayPal Here launched in March 2012, three years later, with a similar reader, rolled out first to a few thousand merchants and sold on PayPal's brand and 100 million users BLK-7 BLK-8. Intuit GoPayment charged monthly fees and about $180 for its reader BLK-5.

Blue Ocean StrategyFounder Domain ExpertiseBarriers to participation

Step 2 of 5 · 2010–15

Square carries the risk and underwrites from payment data

Sellers without a merchant account could only start in minutes if someone else took the risk the bank would have assessed. Square did. McKelvey says its sellers were so small that their bank accounts would not pass a processor's checks, so Square put its own balance sheet behind them BLK-2. Today Block describes Square as the merchant of record: it settles funds with sellers and, when a seller cannot cover a chargeback, it bears the loss BL1.

Square replaced checks at sign-up with controls on the payments themselves. In 2011 it held funds for 30 days once a seller's payments passed $1,000 in a week, having earlier capped each seller at $100 a day, and it checked sellers against sources such as Yelp BLK-5. Every payment added to what Square knew about the seller. By 2015 it accepted about 95% of sellers who applied while keeping risk and fraud losses low BLK-3. The same payment record later underwrote loans in step 4.

Rivals PayPal Here also asked merchants to apply and admitted them in stages, starting with a few thousand; PayPal planned to sell it hardest to its existing account holders rather than to sellers new to cards BLK-7.