Square prepares new reader with support for forthcoming cards with embedded computer chips
Square Bets Big on Next-Gen Credit Card Tech — Square first came to fame with a credit card reader you could plug into your iPhone jack. But next year, the company's signature device …
Context & Ripple Effects
Square's entire merchant base runs on the headphone-jack dongle it was mass-producing back in 2010 at a rate of 10,000 readers a day, and the company only just rebuilt the device's internals in December 2013 with help from an Apple Lightning engineer (Wired's profile of that redesign). That hardware rhythm now collides with the card networks' move to issue credit cards carrying embedded computer chips instead of relying on the magnetic stripe.
The announcement landed with unusual breadth for a hardware preview — Square itself, The Verge, The New York Times, TechCrunch, Forbes and others all carried it on or about July 30, 2014 — reflecting how central the dongle is to Square's identity as the swipe-era upstart.
First-order effects
- Square faces a fleet-wide hardware transition: every merchant dongle in the field is built around the magnetic stripe, so supporting chip cards means designing, manufacturing and distributing a new reader across its small-business customer base.
- Merchants on Square will eventually need upgraded hardware to accept the forthcoming chip cards, making the reader swap a direct cost and logistics event for the sellers who power Square's volume.
Second-order effects
- Rival payment terminal makers whose countertop hardware already handles chip cards gain a selling point against Square among merchants weighing the upgrade, pressuring Square on price and rollout speed.
- Card issuers pushing embedded-chip cards depend on acceptance points like Square's to make the new cards usable at small merchants, aligning the networks' incentives with subsidizing or accelerating Square's reader transition.
Third-order effects
- If the chip migration proceeds as the card industry plans, small-merchant payments hardware shifts from a one-time purchase to a recurring replacement cycle, changing the economics for dongle-based players like Square.
- A chip-card standard that requires new physical readers also lowers the barrier for the next interface change — contactless and phone-based payments — since merchants will already be replacing terminals when those arrive.
The trend: US card payments are migrating from the magnetic stripe to embedded-chip cards, forcing mobile-payments companies like Square into fleet-wide hardware refreshes their original dongle model never planned for.