If I were the Square founders, and I was expecting conventional credit card processors to go on the offensive, I might offer them a red herring: a simple technical limitation, something on which the competition would focus exclusively. The trick is that I would choose this technical limitation such that I could suddenly correct it at a later date, leaving my competitors without any ammo.
If I were feeling really clever, I might choose this herring such that my initial costs were also reduced. For example, I could make my initial card scanner so simple that it doesn't even require a watch battery or Hijack-style power[1]. Of course, I couldn't encrypt data passing through the jack ... until I decide to send out a new version of the card scanner with an extra $3 worth of microcontrollers and batteries inside. (Wait for it...)
P.S. - I doubt very much that I would have thought of that ahead of time. But, maybe the Square guys are smarter.
If I were feeling really clever, I might choose this herring such that my initial costs were also reduced. For example, I could make my initial card scanner so simple that it doesn't even require a watch battery or Hijack-style power[1]. Of course, I couldn't encrypt data passing through the jack ... until I decide to send out a new version of the card scanner with an extra $3 worth of microcontrollers and batteries inside. (Wait for it...)
P.S. - I doubt very much that I would have thought of that ahead of time. But, maybe the Square guys are smarter.
[1] http://www.eecs.umich.edu/~prabal/projects/hijack/