Square Inc. is coming out of its corner swinging.
Not content to compete just against terminal makers, the San Francisco company will challenge established players in the mobile payments field when it allows consumers to initiate transactions at the point of sale without a card.
Square's system is limited in that it works only with the subset of merchants who are comfortable using a mobile phone or iPad in place of a cash register. But experts say Square's marketing prowess, well-financed backers and steadily growing base of retailers could give PayPal Inc. and other big contenders a run for their money.
PayPal and Square have "certainly discovered that the formula for pushing out new payment methods is through the merchants," by filling their need for cheaper services, said Avivah Litan, a vice president and distinguished analyst with the research firm Gartner Inc. "It's the payment accepters that drive new payment types, and PayPal figured that out many years ago. Square has figured it out for the physical space. They still have a long way to go but the formula is right."
By contrast, many mobile payment systems banks favor require special hardware.
Square's new service, called Card Case, stores users' payment details for future access from a mobile device after users swipe their card at a Square merchant once. It currently works only at merchants that use a new Square card processing application, Square Register, for Apple Inc.'s iPad. Just 50 merchants use the Register app today.
Anuj Nayar, a spokesman for PayPal, declined to comment on Square's service but reiterated PayPal's plans to expand its mobile services to physical merchants.
"We will be trial-ing [at the] point of sale by the end of the year," Nayar said, declining to discuss details of PayPal's plans. PayPal, a unit of eBay Inc., in April announced it had acquired a startup called Fig Card with a similar service.
Though Fig and Card Case aim to improve the experience for consumers by cutting out the plastic card, experts say these and other "digital wallet" apps in many ways are trying to improve a process that really isn't broken.
"In this whole space I think what folks have lost a little sight of, frankly, is making a payment in the United States or Canada in the offline world is not that difficult," Brad Strothkamp, a principal analyst at Forrester Research Inc., said.
Regardless, major payment networks, wireless carriers, payment terminal makers and a slew of software developers are investing a lot of money in trying to bring mobile payments to the physical point of sale.
The payments industry has largely bet on a technology called near-field communication for contactless payments made from chips built into mobile phones. Such systems face big barriers, such as convincing merchants to invest in new hardware and getting consumers to buy NFC-equipped phones.
Companies like Square have chosen to instead offer services that work mostly with existing hardware. Consumers enroll with Card Case by first making a card payment to a merchant that uses Square Register. Consumers then receive a text message invitation to install Square's app on their smartphone. The app also asks a consumer to upload their photo, which can be displayed to the merchant during a transaction for authentication. For large transactions, the Card Case feature also requires a customer to input a PIN.
"There's a lot of moving parts … that have to come together for that but I still like it better than NFC because I always like things that work with software better than things that require hardware," Aaron McPherson, a practice director with IDC Financial Insights in Framingham, Mass., said.
