Square, which has been scrambling to add fee-based services to pad the revenue it gets from mobile payments, faces a formidable new challenge in Amazon's launch of a rival mobile card reader. Banks that offer their own mobile card readers, such as PNC, BBVA and Bank of America, may also feel the increased competition for merchant business.
Amazon launched its Amazon Local Register card reader with an aggressive introductory swipe fee of 1.75% that lasts through the end of 2015. Even after that period, its 2.5% rate comes in below Square's 2.75% — and Square has already tried, and failed, to support an alternate fee structure.
"Square faces margin pressure and will have to respond to this," said Richard Crone, a payments consultant. "Amazon has 220 million registered users and it already has their payment credentials."
Square's options include repackaging its pricing, lowering its transaction fees, or adding even more fee-generating services, Crone said. And Amazon's move is a threat to more than just Square. "It places pressure on literally everybody in the merchant processing and acquiring space," he said.
Square earlier attempted to attack its own fees by introducing an optional flat monthly rate. Merchants could opt to pay $275 a month instead of 2.75% per swipe, but this came with restrictions on the transaction volume merchants could accept through Square. Merchants didn't like this, so the company eliminated the flat-rate option in early 2014.
Since then, Square has added a number of revenue-generating products, including appointment-scheduling services, small-business lending and interactive receipts. It also plans to release a chip-and-signature version of its card reader in 2015 to accommodate the EMV migration in the U.S.
In an email, a Square spokesman reiterated the company's focus on providing services to local merchants but did not say what, if anything, it would change to address Amazon's product launch. Amazon did not return a request for comment by deadline.
"In the aftermath of the Amazon Local Register launch, Square's diversification beyond point of sale payment acceptance looks incredibly forward-thinking," said Jordan McKee, a senior analyst at 451 Research. "The vendor has uniquely positioned itself as a commerce-enabled hub by offering a full suite of services for small to medium sized businesses. It's also done a nice job of embedding itself into its clients' businesses, helping to transform it into a difficult to replace commerce lynchpin."
Still, Amazon's entry into the mobile acceptance space will be troubling for Square, McKee said. "As expected, the e-commerce giant has wielded price as its competitive differentiator, and that's sure to spell some payment processing revenue erosion for Square."
But Amazon will be quick to follow these moves as well. It already offers many services that allow consumers to make purchases at other merchant sites, and could use the same strategy at the retail point of sale, McKee said.
"The point of sale is Amazon's entry point into bricks-and-mortar stores, but a suite of commerce-related services will likely follow in the near to midterm," McKee said.
Amazon can keep its pricing low because many of its customers have pre-registered their bank account numbers for ACH transactions, which are less expensive than credit cards, Crone said.
"Even if the percentage of [Amazon ACH registrations] is less than 10%, they can use that advantage to lower their costs," Crone said. Square would be challenged to do the same, since it typically does not require consumers to register credentials in advance to make a payment. "People generally don't carry their checkbooks with them," he said.
Square does have advantages it can rely on — its ancillary offerings will help it compete, said Rick Oglesby, a senior analyst and consultant at Double Diamond Payments Research. And Amazon's promotional offer carries some limits &mdash ;the $10 credit to cover the cost of the mobile attachment and the temporary 1.75% rate are tied to the merchant agreeing to deposit the funds into an Amazon Payments account, which requires the merchant to wait before getting full access to funds.
"I'm not sure the 0.25% price reduction will be enough to entice Square's better customers to move, although it may be enough to move some of Square's low-value merchants," Oglesby said. "That may actually provide Square with a benefit of taking away the customers that cost them money while leaving behind the best customers that use more of Square's services and generate real revenue."