Payments Processing Gets More Square and Social

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

The last thing that comes to mind when thinking about building client-merchant relationships is the wallet. But this is the concept that lays behind the latest application developed by Square, the San Francisco-based company known for its smart phone attachable card reader. This time, there is no reader; just say your name and there you go: payment accepted (your photo is recognized by the cashier and the bill is uploaded into your Square account).

The philosophy of building relationships is gaining ground among the players in the new payment solutions market. Flint Mobile, another American company, is pushing its marketing strategy with arguments such as “online customer engagement” and “on-the-go businesses” solutions. Its app, called Flint, uses the smart phone camera in the payment process, along with the card owner´s signature.

With these emerging solutions, how is the traditional payment landscape evolving?

The veterans have started to team up with the newcomers. While VISA (NYSE: V) is betting on Square, MasterCard (NYSE: MA) is investing in iZettle, the Swedish start-up that launched its card reader product in Germany and the Netherlands and has recently landed in Spain.

These veteran companies have both taken a deep plunge into the waters of their own contact-less micropayment solutions – based on near field communication (NFC) technology.  Others, such as Google (NASDAQ: GOOG) and EBay´s (NASDAQ: EBAY) Pay Pal, have developed online wallet solutions. And analysts are pointing to Google's possible interest in VeriFone Systems (NYSE: PAY), the US provider of in-store bank card processing terminals.

With similar technical proposals and arguments revolving around the “we'll make your life easier” argument, all the young companies are targeting a very sensitive market segment - the SMEs, or small entrepreneurs and liberal professionals.  Cheaper or more flexible commissions, faster deposits, and shorter installing times are strong enough arguments to be taken into account. After all, what the customers want is safety, efficiency, and simplicity.

Apart from these tangible advantages, the start-up revolution also focuses on something dear to numerous market segments: the social dimension. Customers can post reviews on the business' Facebook page, check out on the timetables of other merchants in the area using these payment systems, and accumulate points and obtain rewards upon repeat visits. Part lure for customers, and part engagement - in the end, these start-ups know that winning their seat at the round table means passing through challenging the traditional intermediation payment model and making it feel more consumer-friendly.

Under these circumstances, what can we expect to see next?

Takeovers are the first thing that comes to mind. But from the market's point of view, we can expect some cannibalism between competing products. For example, the recent launch by Square of the gift cards for shoppers is a strategy targeted at eating some market share from Pay Pal Here, the credit card reader solution by PayPal.

According to financial media, Square was processing $5 billion in mobile payment transactions at the beginning of Q2 2012.  PayPal's net total payment volume equaled $34 billion in the second quarter, up 20% year over year, while merchant services payments totalled $23 billion (a 23% increase). 

With similar tariffs per service – between 1.95% and 2.75% per swipe, or a monthly flat rate – newcomers might want to include the opportunity costs when designing their differentiation strategy: what price will loyal clients be willing to pay for that extra, unique feature that the competitor has just launched? We can also expect an ultra segmentation of payment solutions, as newcomers might try to fill in the uncovered gaps. iZettle has done so through launching its own card reader for European cards that function mostly with incorporated chips – something that Square has left behind.

Geography might also make a difference. South American countries could be an interesting niche for newcomers, if prices are maintained at an affordable rate and technology takes into account local cultures. The Tecnocom report on payment methods shows that additional advantages offered by the payment processing solutions are highly valued by Latin Americans.

What customers, final clients, and businesses will embrace are simple to use, effective, quick, and safe solutions that would offer real added value. I know, dear merchant, this makes your head spin: NFC, online wallet, bank card reader, the jargon goes on and on. However, the more companies in this space, the cheaper your options will, and the better your final service, spurred by competition between the players.


topcattns has no positions in the stocks mentioned above. The Motley Fool owns shares of Google, MasterCard, and VeriFone Holdings. Motley Fool newsletter services recommend eBay, Google, and Visa. 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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