jonbwhite

It’s now been a few weeks since Square Cash was available to the public, with much talk surrounding the use of e-mail as a service and concerns of security.  However, I have yet to see anyone talk about how Cash actually moves money around, which I think is actually one of the most interesting facets of the service.

ACH - the status quo

First, a primer on how other services move money.  Pretty much any service that allows you to send and receive money requires you to connect your bank account via the Automated Clearing House (ACH).  You may be able to use the service with just a credit or debit card if you only plan on making purchases, but if you want to receive money you must connect a bank account.  The telltale sign that you have connected an account via ACH is if you have ever been asked to verify two small deposits into your account.  Services such as PayPal and venmo use ACH in this manner, and typically you hold a balance in your account with this service that you must transfer out to your bank account if you want to access the money outside of the service.  

This is the status quo among payment services (with notable exception dwolla) and frankly it’s terrible.  Not only do you have to sign up for this service, you must then enter an account number that you likely need to look up somewhere, then wait two days to verify these two small dollar amounts into your bank account.  Granted, the worst part about this process, the two day waiting period, is to help prevent fraud, but as an impatient user I can’t help but think that there must be a better way.

Enter Square

This lengthy account creation process creates friction with users, and Square clearly recognizes that; to start sending money with Square cash, you simply send an e-mail and cc cash@square.com.  Once you do this, Square will send you an e-mail that asks you to enter your debit card info, and you are done.  Cash sent.  On the receiving side, you also get an e-mail asking for your debit card, and nothing more*.  There are no bank account numbers involved, how can they do this?  The answer deceptively simple: they issue a refund to your debit card for the amount you are sent.

To explain this, let’s jump for a moment into the world of credit cards.  Obviously the most important feature of a credit card is to be able charge an amount.  In the world of retail, however, a mechanism to refund an amount in the event a customer wishes to return an item, is equally important.  With a credit card this simply means your account is credited instead of charged.   With debit cards, your “balance” is an actual bank account, so when you refund a purchase on a debit card, money is deposited into your account directly.

The genius of Square Cash is that someone realized you can process a refund without having an initial charge in the first place.  This makes debit card refunds an interesting corner case, and given that Square’s primary business is credit card processing, it is not surprising that they are the ones that figured out this was possible (and presumably get a pretty great deal on the rates while they are at it).  

Now, I’m not sure how happy the banks and/or credit card companies are with Square using (abusing?) the system in this way, but I’m sure they have or will work out the necessary terms to keep moving cash.  In the mean time, I will continue being a satisfied Square Cash customer.

Postscript

Reducing friction doesn’t come for free, and Square is likely going to deal with more fraud than these other services.  One way they are combatting this is via incremental account verification.  For example, if you send money over $250, Square requires additional information from you to upgrade your account to “Gold Status”, including your address and social security number.  This way, people can start using Square cash for small values with minimal setup, and only if/when they use it for large values will they have to input this supplemental information.

* Now, you can use Square Cash directly with a bank account, but only for receiving money, since the two-step ACH verification process is only needed to make withdrawals from an account.  A debit card is still required to send cash.