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Thursday, December 17, 2009

Square solution for mobile payments

Jack Dorsey, founder of the social network and micro-blog platform Twitter, launched a new company called Square Inc. on Dec. 1, 2009. The new company developed a payment device for use with Apple Inc. iPhones. It contains a reader no bigger than a universal serial bus memory stick that plugs into a mobile phone's headphone jack.

According to Square's three-page Web site, users don't need to sign contracts and don't pay monthly fees. The site also claims there are no hidden costs.

In a video interview with TechCrunch reporter M.G. Siegler, Dorsey said, "We wanted to allow people to very easily and quickly, within 10 seconds, be able to accept … credit cards easily and efficiently." During the same interview, Siegler uses the product to buy Dorsey coffee. The interview is available at www.youtube.com/watch?v=dajrott-nlpk .

Hip to be different

This is not the first device to convert a mobile phone into a payment terminal. Applications for iPhones and Research in Motion's Blackberry handsets have been around for a few years. Nor is this the first reader that can be plugged into a mobile device to enable magnetic card swiping.

What's new is that the merchant boarding process promises to be quicker and cheaper than for traditional bankcard processing. The device itself is free, and the application process for the service takes about 48 hours. And according to several sources, the company intends to shave down the application process to mere minutes.

For added security, account holders can upload photos to their Square accounts so sellers or merchants can identify them by photo when accepting payments.

Receipts can be delivered via text message or e-mail, and the application provides for loyalty rewards. Square will even donate a penny from each transaction to a charity selected by the merchant, if desired.

Though the details have not been disclosed, it appears the service functions similarly to Paypal Inc.'s online system, but for mobile payments. This solution seems to target smaller retailers and individuals whose sales are so limited that standard merchant processing agreements do not make financial sense for them.

Kevin Colaço, President and Chief Executive Officer for InvenTrak, a hosted merchant services company, said, "I think this can be a cool product in the continuing quest of technology to control the point of purchase at all levels. Adding sellers as I define them (bake sales, car wash, person to person et cetera) could provide a vast opportunity if the ISO market can play in that space."

Payments industry consultant Gregory Holmes agreed that the real potential of Square would be breaking into a market that is currently not accepting payment cards like the person-as-merchant scenario where an individual without a merchant contract can accept card payments.

Unanswered questions

Unfortunately, Square could not be reached for comment. Holmes, operating on the assumption that the Square is employing the same sort of payment aggregation as Paypal except in the card-present environment, said the Square payment system could be very exciting but there are many unanswered questions.

The first ones on his mind were: Will the card networks allow this? Will they expand their rules to apply to aggregation for card-present transactions? and Would the merchant get the card-present rate?

"The other thing to consider with Square is that any entity that is doing aggregation today has to have very, very sophisticated risk, fraud control and KYC (know your customer) procedures in place because as the 'merchant on record' that entity and its acquirer are responsible for compliance with all rules as well as liable for most fraud," Holmes added.

Square is also not talking to the press about the Payment Card Industry Data Security Standard (DSS) or the Payment Application DSS.

Ready to roll

The system is in beta testing in a few small businesses in San Francisco, where Dorsey lives part-time. Square's product and engineering office is also in San Francisco, and the company's operations and risk partnership offices are in St. Louis and New York, respectively.

The Square platform only works on iPhones now, but the company plans to develop software to make the device compatible with all makes of smart phones. The idea for the payment system originated when Dorsey's friend Jim McKelvey was unable to sell a piece of his glass art because he didn't have the ability to accept a potential buyer's credit card. That was in February 2009.

The two began working on the problem immediately and secured $10 million in funding from Khosla Ventures and several angel investors. TechCrunch claims the company has been valued at $40 million – before the product has even been officially launched.

Reportedly, Square plans to roll out the product to the public at large early in 2010. To stay on top of this company's development, follow its tweets on twitter.com/square . end of article

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