How Square Works

By: Dave Roos
The Square device can turn your smart phone into a credit card machine. See banking pictures.
The Square device can turn your smart phone into a credit card machine. See banking pictures.

Cash is so 20th century. Consumers are addicted to the convenience of plastic. Have you ever used a credit or debit card to pay for a pack of gum? You're not alone. In 2012, American shoppers used cash to pay for only 27 percent of retail transactions. The vast majority of transactions were paid with credit cards (29 percent) or debit cards (31 percent) [source: New]. But even credit cards are starting to feel old-fashioned. More and more consumers are leaving their wallets at home and doing their shopping entirely with their smartphones.

Square is a popular service that allows you to buy, sell and send money using any Apple or Android mobile device. With three free mobile apps — Square Register, Square Wallet and Square Cash — Square is designed to help small businesses accept credit card payments and to help consumers transition to a cashless, cardless lifestyle.


Square is one of several leading players in the emerging world of mobile payments. According to research firm Gartner, more than 200 million people worldwide made payments with their smartphones in 2012, either by swiping their device through a special reader or making direct payments with a service like Square Wallet or PayPal. That number is expected to climb to 384 million people by 2015 [source:Deloitte]. IE Market Research predicts the mobile payment industry to total $998 billion in revenue by 2016 [source: Nicole].

If you are ready to join the wallet-less revolution, keep reading to learn how Square can turn your smartphone or tablet into a portable cash register, and how you can send as much as $2,500 to a friend using nothing more than your e-mail.

Selling With Square

This coffee shop in New York uses Square for payments.
This coffee shop in New York uses Square for payments.
© James Leynse/Corbis

One of the biggest selling points of Square is the ability for small businesses to accept credit card payments. A great example is a vendor at a farmer's market. In the past, shoppers had to use cash to buy organic kale and gooseberry jam at a farmer's market. With a service like Square, a farmer's market vendor can turn her smartphone into a fully functioning cash register that accepts payment by credit or debit card and deposits the funds directly into a bank account.

The first step is to download the Square Register app for your iPhone, iPad or Android device through either the iTunes App Store or Google Play. Then you need to sign up for Square Register at the Square Web site. Once you sign up, Square will ship you a free card reader, a small device that plugs into the headphone jack of your smartphone. You can also buy the card readers at drug stores like Walgreen and Rite Aid and receive a credit for the cost for later use with Square.


Next you need to enter your bank account information into the app so that credit card payments can be deposited into your account. Square says that most payments are deposited in one to two business days.

The service isn't free, though. Square charges a fee of 2.75 percent of each transaction swiped or a flat $275 monthly fee. If you are a farmer's market vender that uses Square Register for relatively few transactions, then the percentage rate is a better deal. But if you are a larger retail store that processes a lot of credit card transactions, the flat monthly rate is the best option. Note that Square charges more for manually entered credit card numbers — 3.5 percent plus 15 cents per transaction. Even if you choose the flat $275 monthly rate, so-called "keyed-in" transactions are charged an extra fee.

Square Register is more than a convenient payment service. The free app works just like a real point-of-sale terminal at a restaurant or clothing store, except those things cost thousands of dollars. The app lets you create entries for everything that you sell, complete with pictures and prices. To make a sale, simply tap the items to be purchased. The app even will add appropriate taxes and tips.

To process the payment, swipe the card through the reader or enter the account number manually (some online reviewers complain that the card reader is unreliable). You can even send receipts by text message or e-mail.

To boost profits and develop your business, the Square Register app offers built-in sales reports and analytics to track your best-selling items and offer loyalty rewards to frequent customers.

Now we'll look at ways to use Square as your virtual wallet.

Paying With Square

Square is more than a mobile cash register. It also offers free apps for making payments with your smartphone and e-mailing money to your friends.

Square Wallet is a free app that allows you to pay at hundreds of thousands of stores and restaurants with nothing but your smartphone.


After you download the Square Wallet app from either the iTunes App Store or Google Play, you are asked to enter your credit card information and upload a photo of yourself. Why do you need a headshot to buy a sweater? You'll see in a second.

Using your smartphone's built-in GPS, the Square Wallet app allows you to browse or search for local businesses that accept Square Wallet payments. When you physically enter a store, you click on the store's name in the Square Wallet app. That's called "checking in" to the store. When it's time to pay for your sweater, you don't even need to take out your phone. Just tell the salesperson your name and they will see your pretty photo on their screen. With a click of your picture, the sweater is charged to your credit card.

If you are a regular at a store or restaurant, you can use a special check-in feature and automatically order your favorite items.

Square's free service for sending money to friends and family is called Square Cash. You don't need the Square device to use it — only an e-mail address and a debit card. Let's say you want to give $50 to your niece for her birthday, but she lives in another state. You could mail her a check or you could use Square Cash. Here's how it works:

  1. Compose an e-mail with your niece as the recipient
  2. Type the e-mail address to the "CC" field
  3. In the subject line, write "$50.00"
  4. Compose your happy birthday wishes and press "send"
  5. Square will e-mail you a link to enter your debit card number
  6. Your niece will receive two e-mails: the e-mail from you and a second message with a link to enter her debit card information
  7. The money will arrive in her bank account in one to two days

No other steps are required to send up to $250 a week. To send up to $2,500 a week, you need to provide more verification information, but only once, and the service is still free.

As with any new technology, Square has its share of detractors. Keep reading for some common complaints with Square services and how the company is responding.

Criticisms of Square

Jack Dorsey, creator of Twitter and founder of Square, holds up the Square device as he speaks during the TechCrunch Disrupt conference in New York in 2010.
Jack Dorsey, creator of Twitter and founder of Square, holds up the Square device as he speaks during the TechCrunch Disrupt conference in New York in 2010.
© Ramin Talaie/Corbis

Jack Dorsey, the founder and CEO of Square, is a self-proclaimed minimalist. Dorsey's first success story was Twitter, which he co-founded in 2006 [source: Delevett]. Part of Twitter's charm is its simple design and creative restraint — every post is capped at 140 characters or less. Square is marketed as a minimalist approach to running a retail business. Instead of buying an expensive point-of-sale system or dealing with bureaucratic credit card companies, just download a free app and go.

Unfortunately, some business owners have found that Square's "simple" sales pitch leaves out some important details about its merchant policies. One of the biggest complaints concerns a deposit limit of $2,002 a week on manual or "keyed-in" credit card transactions. Square charges more for keyed-in transactions because these carry a higher risk of fraud [source: Accertify]. That's the same reason Square puts a limit on how much money a merchant can deposit each week using the keyed-in method.


For a larger business that processes hundreds or thousands of transactions each week, it's easy to reach that $2,002 limit. According to complaints to the Better Business Bureau (BBB), many business owners were unaware of the policy, which holds all deposits in excess of $2,002 for 30 days [source: BBB]. In response, Square notes that all customers can request to raise their deposit limit [source: Square]. Requests are processed on a case-by-case basis.

One of the most widespread criticisms of Square is its poor customer service. Merchants with questions about rejected transactions, canceled accounts and held funds complain about the lack of a phone number staffed by actual human beings. Instead, Square encourages customers to search its ample online help resources (FAQs, video tutorials, how-tos), send an e-mail or visit its support account on Twitter. Although Square insists that it responds to all e-mails within 24 hours, frustrated merchants complain of unanswered e-mails and costly unresolved conflicts [source: Parker].

Square's competitors in the mobile payment industry see customer service as a way to topple the upstart company. PayPal, for example, employs 6,000 people in its customer service department. The entire staff of Square, headquartered in San Francisco, totals fewer than 500 people [source: Kim].

For lots more information about mobile payments, virtual wallets and the future of money, check out the related links on the next page.

Lots More Information

Author's Note: How Square Works

I can easily envision a day when my grandchildren will ask me what money looked like. Even today I feel a little strange using actual cash (or coins, for heaven's sake) to make a purchase. Why are we still passing around these wrinkled pieces of paper when the entire financial system is electronic? It's not as if your bank has a stack of cash waiting in a vault with your name on it. Money is transferred in and out of your bank account as a string of ones and zeros. Why should our transactions at the mall be any different? Cash equals hassle. You have to go to an ATM to get it. A store has to count it, stash it in an envelope and lug it down to the bank to deposit it. And don't even get me started on checks! Obviously there are obstacles to a cashless economy. What about people who don't have bank accounts or credit cards? What about fraud, identity theft and other security concerns? Still, I believe that I'll see the death of cash in my lifetime. I'll bet you a two-dollar bill.

Related Articles

  • Accertify. "Card Not Present Fraud: A Simple Primer." (Oct. 31, 2013)
  • Better Business Bureau. "Square" (Oct. 31, 2013)
  • Delevett, Peter. "From Twitter to Square, Jack Dorsey is on a hot streak." San Jose Mercury News. Oct. 27, 2013. (Oct. 31, 2013)
  • Deloitte. "Trends and Prospects of Mobile Payment Industry in China 2012 – 2015." April 21, 2012. (Oct. 28, 2013)
  • Kim, Ryan. "Square rivals bank on customer support to compete." gigaom. Sept. 19, 2012. (Oct. 31, 2013)
  • New, Catherine. "Cash Dying As Credit Card Payments Predicted to Grow in Volume: Report." The Huffington Post. June 7, 2012. (Oct. 28, 2013)
  • Nicole, Kristen. "Square Cash Raises Security Questions: Too Simple for the Masses?" Silicon Angle. Oct. 16, 2013. (Oct. 28, 2013)
  • Parker, Phillip. "Square Review." July 24, 2013. (Oct. 31, 2013)