Beware the Underdog of Mobile Payments

Leo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Mobile payment company Square was founded in 2009 by Twitter creator Jack Dorsey and computer science engineer Jim McKelvey, and has evolved rapidly over the past four years. The company, which counts Starbucks CEO Howard Schultz and Yahoo CEO Marissa Mayer among its investors, has grown rapidly from a mobile payment app into a budding e-commerce site, which now aspires to challenge industry behemoths Amazon (NASDAQ: AMZN) and eBay (NASDAQ: EBAY).

If Square eventually goes public, as some analysts speculate, the influx of cash could make it a force to be reckoned with in e-commerce. How did this company rise to prominence in the three short years since its first app was launched, and how will its industry peers respond?

Hip to be square

Square’s first product, Square Register, allows individuals and merchants to accept debit and credit card payments on their Apple (NASDAQ: AAPL) iOS and Google Android mobile devices via the Square Reader - a small card-reading dongle that can be plugged into the audio jack. In response, eBay’s PayPal launched a similar product, PayPal Here, in March. Square charges 2.75% per transaction, while PayPal charges 2.7%. However, Square offers a flat rate of $275 per month for heavy users, which could generate substantial savings for small businesses. Square claims that its service has over 3 million users.

Square’s second product, Square Wallet, is an online wallet that allows customers to pay by simply checking into a location. The app links a user’s credit card information, loyalty cards and available gift cards together, allowing users to simply pay by saying their name. PayPal also recently introduced a similar service, in which users can pay from their smartphones at participating restaurants.

PayPal goes a step further than Square by adding location-based social features to its app, similar to Yelp and Foursquare, which allow users to find nearby businesses. Several Starbucks and Jamba Juice locations have used PayPal’s app to store customer photos, ordering histories and special dietary needs.

Both Square and PayPal are convinced that Americans will eventually abandon their physical wallets in favor of a digital one on their smartphones. According to PayPal, a recent study indicated that 80% of surveyed Americans wanted to leave their wallets, and their collection of loyalty cards, at home.

A square Apple

PayPal has been particularly aggressive in expanding its brick-and-mortar footprint. Since introducing in-store checkout in December 2011, the service has been adopted by 250,000 stores, including major retailers such as Barnes & Noble, Radio Shack, Home Depot and Toys R Us. The company has a stated goal of expanding this service, which integrates into existing POS (point of sale) systems, to 2 million stores by the end of the year.

Not to be outdone by PayPal, Square recently launched the Square Stand, a $299 device which instantly transforms any iPad 2 or iPad 3 into a POS register capable of accepting debit and credit card payments. The total cost of an iPad and the Square Stand is around $800, far less than the thousands it costs to set up a traditional POS system. In addition, many Americans already own previous generation iPads, considering that Apple sells nearly 20 million iPads every quarter. Connecting the device to an iPad running Square’s POS management apps also allows businesses to track sales data, control inventories and manage employees.

Square also offers the more complex “Business in a Box” bundle for $299, which operates on the same concept as the Stand (an iPad as a cash register), but includes a cash drawer. An additional printer for paper receipts can be purchased for $300.

Associating itself with Apple was a brilliant move by Square, which used the combined aesthetic appeal of the Square Stand and the iPad to distance itself from traditional POS systems, which are far from elegant. However, Square’s footprint is still tiny compared to PayPal’s retail partnerships. Square currently has 13 businesses signed up to use Square Stand at 30 locations nationwide.

Squaring off against Amazon

Both eBay and Amazon started off as e-commerce portal sites before expanding into other businesses. eBay later expanded into online payments with PayPal, and Amazon started producing media consumption devices such as the Kindle.

Square is now doing the opposite. It is expanding from the online payments business into the e-commerce portal one, issuing a direct challenge to Amazon and eBay. Its new service, Square Market, essentially offers a similar experience to Amazon or eBay, with a heavier emphasis on local businesses. Square Market allows sellers to post photos of their physical store front, hours of operation, and contact information via a Google Maps plugin. Square Market is a very visual site, which has more in common with Pinterest than Amazon’s rigidly indexed collections.

Although Square has a long way to go before it catches up to Amazon or eBay, it has the unique advantage of an existing network of retailers and companies which already depend on its payments system. Square allows merchants to set up shops for free, although it charges its traditional 2.75% transaction fee on every purchase. This is different from Amazon, which charges $0.99 per listing, and eBay, which charges fees that range between free to $0.30 per sale. Similar to eBay, but unlike Amazon, Square merchants are responsible for covering all shipping costs.

However, Square might have an ace up its sleeve with its relationship with Twitter, since CEO Jack Dorsey is also the executive chairman of Twitter. When Twitter users tweet a Square Market listing, a “product card” is create that includes a “buy” button that goes straight back to Square Market. In other words, Twitter’s 500 million users could turn the social network into a storefront for Square Market.

The Foolish Bottom Line

Although Square seems like the underdog of the online payments industry, its numbers are surprisingly strong. The company recently revealed that it was processing over $15 billion in payments annually. Considering that Square charges 2.75% per card swipe and 3.5% + $0.15 per manually entered transaction, its annual revenue should be over $412 million. By comparison, PayPal processed $97 billion in payments last year, a 25% increase over the previous year.

I strongly believe that Square is one of the hottest names in e-commerce right now, and investors should be on the lookout for a possible IPO this year. Square’s strong backing from major industry players, its steady, disruptive growth in the POS market, and its new e-commerce portal all indicate that this four-year old company is one to keep an eye on.


Leo Sun owns shares of Apple. The Motley Fool recommends Amazon.com, Apple, and eBay. The Motley Fool owns shares of Amazon.com, Apple, and eBay. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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