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Visa And Square: Why Goliath Is Investing In David

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Square, the mobile payment start-up founded by Twitter creator Jack Dorsey, announced today that it has secured a "strategic investment" from Visa. The terms of the investment have not been revealed, but Keith Rabois, COO of Square, told me that the investment is not motivated by a need for additional capital. Square had already raised $37 million in investments, prior to the Visa announcement.

Instead, the investment is a bit of positioning for both Visa and Square. For Square, the benefits are somewhat obvious: Backing by a company like Visa lends legitimacy to the rapidly growing venture and also serves to allay some of the security flaw allegations that have been lobbed at Square. Moreover, Visa's involvement paves the way for joint ventures; although no concrete plans have been revealed, Rabois hinted that this is just the beginning of a partnership between Visa and Square that will encompass a number of joint efforts.

Additionally, Visa has years of experience it can share with Square.

"They've been converting paper transactions to electronic transactions successfully for over 40 years, both in retail environments and on the internet," said Rabois. "They have unparalleled expertise."

What Visa gains from the investment is a little less clear on the surface. Square is often seen as a "disruptive" company -- a bit of a competitor to traditional card companies, who often charge fees above the low 2.75% charged by Square. Is this an example of a mega-company sticking its nose in a start-up's business, to keep an eye on the competition? According to Rabois, that's not the case. "We think of ourselves as disruptive to the financial services world," he told me, not as competitors to Visa.

Indeed, Square could potentially help Visa and other card companies by bringing plastic transactions to markets that have historically been underserved.

"Our target market is the 27 million businesses that don't currently accept Visa and Mastercard," Rabois told me. "We're turning paper transactions -- cash and paper checks -- into electronic transactions that route through Visa, Mastercard, Amex, and Discover. That's what we're passionate about and that's what we're empowering. These businesses, historically, have been disqualified or ineligible or just deterred from accepting credit cards. That's where we're aligned and that's where we bring value to [Visa]."

“Square’s early success suggests that using Square and a mobile device, new types of merchants will now be able to accept payment and help grow their business via Visa’s global network with the security, speed and reliability we provide,” said John Partridge, President of Visa Inc, in a statement that echoed a similar sentiment.

Currently, 8.2 million businesses in the United States accept credit cards. As Rabois noted, over three times that number of businesses do not accept credit cards.

"Our expertise is bringing [credit card payments] to the smallest businesses, to the newest businesses that are created today, by removing complexity and eradicating risks," Rabois told me. "We don't charge the businesses to start anything. The only time we charge anything is when someone succeeds in selling something. There's no investment risk for the business today."

With its strategic investment, Visa is likely trying to minimize risk as well. Whether friend or enemy, it's wise of the credit card giant to keep Square close.

Square was one of Forbes' "Names You Need To Know In 2011." The company reports that 100,000 new merchants are signing up each month. In the first quarter of 2011, Square processed $66 million in transactions; the company expects to to process nearly $200 million in transactions in Q2.