How Square Used Design to Pioneer Embedded Payments
And create a $50 Billion-dollar Enterprise in the process.
When we think about Strategy, the word Design, is not one that tends to come up immediately. For many of us, who work on Strategy, we tend to look at it as a plan. One that provides those who need to manage and execute it, with an understanding of the industry, the competition, and the actions we have to take, to achieve our goals.
But the concept of strategy can have many different faces, traditionally, when we talk about Strategy in a Corporate setting, we either mean Organizational, Competitive, Functional, or Operating Strategy.
For an Organizational Strategy, often referred to as an organizational-level strategy, we focus on developing the vision, mission, values, or purpose of the organization. This often relates to the company’s core value proposition and objectives that it hopes to achieve in doing so.
A Competitive Strategy, often referred to as a business-level strategy, focuses on how a business unit will compete against competitors within the market. Implementing a business unit’s competitive strategy should further the organization-level strategy. It may also regard what the company stands for and how it will be perceived by stakeholders and third parties.
A Functional Strategy concerns how a functional division of a company will achieve its objectives. Carrying out a functional strategy is in support of a business unit’s competitive strategy through maximizing resource productivity. It focuses on developing competence in pursuit of a competitive advantage.
While often included within a functional strategy, an Operating Strategy is concerned with how the component parts (operating divisions) of an organization deliver effectively the corporate, business, and functional-level strategies in terms of resources, processes, and people. They are at the departmental level and set periodic short-term targets for accomplishment.
The mistake that many companies make, is using these M.B.A. definitions in developing Strategies for companies, that are nowhere near maturity and don’t actually have the components, such as market share, employees, or cash, to actually benefit from these types of Strategies.
The same applied to Square, when founders Jack Dorsey, and Jim McKelvey, noticed two distinctive trends, back in 2009.
With the breakthrough of Apple's iPhone, as well as the growth in Online Commerce, they noticed a problem that was occurring throughout the U.S.
More U.S. consumers were moving away from paying in cash to paying by card, a great convenience for consumers, but a major problem for sellers, as most of them, especially small merchants, didn't have a way to accept card payments.
A problem, that led them to create Square, and launch the Square Reader, a device that allowed Merchants to accept Payments, by plugging it into the headset jack of their iPhones.
For an industry, that was very monopolistic and static at the time, this innovation allowed a group of Merchants (Micro to Small), to all of suddenly be part of the Digitization of Payments.
If you want to learn more about their story, I recommend reading The Innovation Stack
As Apple introduced new products, Square focused on being one of their premier "hardware" partners, as they used Apple Products to develop their POS device, which eventually got them to become the POS terminal for Starbucks, and many other Small Businesses across the U.S. and over 8 other countries in the world.
Which turned their startup, into a $50 Billion company, at its peak, and now is a division in Block, Inc. a holding portfolio that includes Square, Cash App, Spiral, Tidal, and TBD.
However, what most people miss in their "Success" story is,
How Square used a Design-Type Strategy, to be the company that essentially pioneered Embedded Payments.
So let me Break it Down for you.
What is a Design-Type Strategy?
A design-type strategy focuses on creating an advantage in challenging situations, by cleverly configuration and combining limited resources.
Especially, in very established environments, a company's ability to use a limited set of resources will increase the competitive challenge they will have to deal with. But by skillfully using those resources to create tighter integrations and efficient use of available resources, a company can achieve a unique advantage.
On the contrary, once a company is given an abundance of resources, in a growing and mature market, the need for higher-quality resources, and tighter integrations and actions actually diminishes.
Why did Square result in a Design-Type Strategy?
When discussing strategy, most Strategy Consultants, describe it by giving it the distinction that it is either a "choice" or a "decision". Both of them, give us the idea that Strategy is a list of possible options, and founders and executives, just need to pick one.
To make matters worse, there is even a formal theory of decisions, that tells you precisely, how to make those choices, by identifying alternative actions, how to value outcomes, and calculating and appraising the probabilities of events.
Great in theory, but if you have ever run a business, you know that those exercises rarely help someone in making a decision or producing clear alternative plans of action.
In reality, many effective strategies are more Designs than decisions. Instead of being chosen, they are being constructed.
So when we look at Square, in hindsight, it looks like the right decisions were made at the right time, and led them to success, but if we look closer, we can actually see that their Strategy similar to their products was Designed and not decided on.
The main reasons that happened, had a lot to do with the Engineering mindset of both founders, who like many in Silicon Valley, look at solving problems through an Engineers perspective, and rely on the popularized "First Principles".
First-principles thinking, which has recently been popularized again by Elon Musk, is a way to reverse-engineer complicated problems and unleash creative possibility. Sometimes called “reasoning from first principles,” the idea is to break down complicated problems into basic elements and then reassemble them from the ground up. Often described as one of the best ways to learn to think for yourself, unlock creative potential, and move from linear to non-linear results.
As Square was challenged with problems, such as the design of their Dongle, how to develop their App and Hardware to communicate through the possibilities provided by the iPhone or iPad, they had to Design ways to solve them, through Engineering, rather than Deciding to select a specific Strategy.
How did Square turn Design into creating Embedded Payments?
When operating with a Design-Type Strategy, there are three aspects that continuously come back, the same applied to Square.
As Square was growing rapidly, they had to (1.) understand the impact they had on the industry by being able to understand their Merchants and understand what they wanted, and why. But knowing what they want, and why they want it, are great input variables into a Design-Type Strategy, but don't create a clear picture.
To be a Pioneer, they also had (2.) to reason through the possible scenarios of what is possible and make a judgment as to what they believe is going to happen. And finally, they had to (3.) Design the Actions they had to take, to be able to be in a position to benefit from those.
So when Square, acquired Caviar, a delivery service for Restaurants that didn’t deliver they anticipated a shift in the Payments Industry that many couldn't or weren't able to see, as most weren’t using a Design-Type Strategy.
Square understood, that by listening to their customers, they shouldn't just focus on being a Payments provider, but that with their skillset, and understanding of technology, the Merchants that adapted to them the quickest and saw the best results, were the ideal target market, and probably most receptive, to develop new features for.
Through the acquisition of Caviar, Square learned that they could develop an experience for Restaurant Merchants, that focused on combining several essential parts of their business to create a better experience and the distinct advantage they wanted.
An experience, that, unlike their competition, would set them apart, and create a competitive sweet spot.
Instead of having a Competitive Strategy, like so many other Payments companies do, where the focus ALWAYS comes down to price, having a Design-Type Strategy, ensured that the conversations about Square were not about price, but about what they could do more effectively than others.
A benefit, that helped Square focus on developing a specific subset of features, for merchants in specific categories, which was most appreciated by Merchants in the Micro and Small in size.
When we look at the way that Embedded Payments is positioned today, we could say that Square was the company that pioneered this movement and did so, by innovating upwards, by developing features for Restaurants, Bookings, and Retail.
Was This the Right Choice?
As Embedded Payments has now expanded into pretty much every aspect of our digital experiences, one could ask, did Square make the right decision, by focussing on being the Vertical integrator of features for the niches they operate in, or should they have positioned themselves to be the Embedded Payments provider for others?
We could evaluate that by focusing on Performance.
Performance in Payments could be measured in several ways, depending on your goals and ambitions, but essentially it comes down to the joint outcome of capability and cleverly utilizing design.
Either a Payments company is able to attract Engineers, who are skillful, have a profound understanding of the underlying technology, and can see ways to improve the Payments Value Chain, by going deeper into the Technology Stack.
Or they identify, through researching, and talking with their merchants, that the ability to Vertically integrate several components to Embedded and Enable, Merchants by reducing the number of separate applications they need, they can provide a solution that gives them a Competitive Advantage.
So through the lens of a Design-Type Strategy, we can determine that Square used the resources it had at that time, to develop a tightly, and clever integration, that benefits merchants, and allowed them to create the foundation, on which they have been able to expand and make other Design-Type Strategies.
An outcome, based on their current situation, that seemed to have worked out pretty nicely.
Conclusion
To use Design as a Strategy, you need to understand how to deal with the current market, the trends that could impact the future, and how you decide to judge them, but most of all, the resources you control.
Too often Startups, and Scale-Ups in the Payments Industry look outwards for information about the market. They look at their competition and react to what they are doing.
But instead of having a Competitive Strategy mindset, which has proven to only produce companies, that battle on price, combine off-the-shelf legacy components, and try to appease everybody, a Design-Type Strategy mindset does the opposite.
Especially, early on, Payments Companies, need to understand that their limited resources, require them to have to make Design decisions that are focused on reducing costs and tightly integrated components to get the competitive advantage they are looking for.
As the market potential decreases, through specialization, it actually sets a Payments company up to address a broader market in the future, by being able to expand Geographically first and using the same foundations, to expand across other verticals, similar to how Square has done.
So if you are currently, developing a Payments company, or thinking how to shift your position in the Payments Industry, you might want to take a note out of Square’s book, and start using a Design-Type Strategy.
Thank You for Reading, feel free to Like, Comment, Share, or Post on Your Socials, as I appreciate all the feedback I can get.
Dwayne Gefferie
P.S. Thank you for all the support last week, which I believe was crucial in getting my LinkedIn back.