Who Created Square’s Technology? Why Retailers Have Reason To Be Nervous

Written by Frank Hayes
January 27th, 2011

The last thing an alternative mobile payments vendor needs is to discover that someone else holds the patent to key technology. In the case of Square, the alternative payments vendor with the little card-swiper that plugs into an iPhone, it’s worse: Square’s founders are now in the early stages of a lawsuit over a patent for technology they not only thought they had invented but for which they actually paid the filing fee of said patent, which actually ended up with someone else’s name on it.

That’s definitely not the kind of problem any retailer wants when it comes to payments processing. You expect that a startup will have to build a customer base, service infrastructure and even technology from the ground up. None of which is easy. But Square’s story turns out to be one that mixes friendship, betrayal, electronics, glass blowing, legal shenanigans and Rashomon-like conflicting stories. In short, way more drama than retailers want from a vendor, even one with interesting technology and the promise of cutting the cost of payment-card processing. When it comes to payments, boring would definitely be better.

The story, outlined in documents from a federal lawsuit filed in St. Louis, Mo., in December, goes like this: Square co-founder James McKelvey is a software engineer and a glass blower who creates glass art, which he sells on the side. But McKelvey couldn’t accept payment cards for his glass art, so he lost some sales.

Then, as the lawsuit puts it: “In or about February 2009, in a flash of inventive insight, Mr. McKelvey conceived of using a cell phone to process credit card payments. Mr. McKelvey conceived of an invention in which a card reader for reading magnetic card stripes such as those found, for example, on credit cards, debit cards, gift cards and the like, would be plugged into a cell phone input jack. Mr. McKelvey also conceived of a magnetic card reader that is small in size so that it would not be cumbersome and would easily plug into a user’s cell phone.”

McKelvey talked to his friend and Twitter co-founder Jack Dorsey who, the lawsuit says, thought using a phone’s camera would be a better way to go. But McKelvey stuck by his idea for a little swipe device. He took the idea to his longtime friend, Washington University electrical engineering professor Robert Morley Jr., for help developing it. Once they built and refined several prototypes—the final design was based on a circuit McKelvey suggested, the lawsuit says—they asked patent lawyer David Chervitz to do a patent search and file for a patent on the invention.

Chervitz did—but only Morley’s name appeared on the application and the patent.


Comments are closed.


StorefrontBacktalk delivers the latest retail technology news & analysis. Join more than 60,000 retail IT leaders who subscribe to our free weekly email. Sign up today!

Most Recent Comments

Why Did Gonzales Hackers Like European Cards So Much Better?

I am still unclear about the core point here-- why higher value of European cards. Supply and demand, yes, makes sense. But the fact that the cards were chip and pin (EMV) should make them less valuable because that demonstrably reduces the ability to use them fraudulently. Did the author mean that the chip and pin cards could be used in a country where EMV is not implemented--the US--and this mis-match make it easier to us them since the issuing banks may not have as robust anti-fraud controls as non-EMV banks because they assumed EMV would do the fraud prevention for them Read more...
Two possible reasons that I can think of and have seen in the past - 1) Cards issued by European banks when used online cross border don't usually support AVS checks. So, when a European card is used with a billing address that's in the US, an ecom merchant wouldn't necessarily know that the shipping zip code doesn't match the billing code. 2) Also, in offline chip countries the card determines whether or not a transaction is approved, not the issuer. In my experience, European issuers haven't developed the same checks on authorization requests as US issuers. So, these cards might be more valuable because they are more likely to get approved. Read more...
A smart card slot in terminals doesn't mean there is a reader or that the reader is activated. Then, activated reader or not, the U.S. processors don't have apps certified or ready to load into those terminals to accept and process smart card transactions just yet. Don't get your card(t) before the terminal (horse). Read more...
The marketplace does speak. More fraud capacity translates to higher value for the stolen data. Because nearly 100% of all US transactions are authorized online in real time, we have less fraud regardless of whether the card is Magstripe only or chip and PIn. Hence, $10 prices for US cards vs $25 for the European counterparts. Read more...
@David True. The European cards have both an EMV chip AND a mag stripe. Europeans may generally use the chip for their transactions, but the insecure stripe remains vulnerable to skimming, whether it be from a false front on an ATM or a dishonest waiter with a handheld skimmer. If their stripe is skimmed, the track data can still be cloned and used fraudulently in the United States. If European banks only detect fraud from 9-5 GMT, that might explain why American criminals prefer them over American bank issued cards, who have fraud detection in place 24x7. Read more...

Our apologies. Due to legal and security copyright issues, we can't facilitate the printing of Premium Content. If you absolutely need a hard copy, please contact customer service.