How Square Shook an Industry in Just One Week

In a week's time, the mobile payments world was turned upside down.

Square's widely publicized mobile-payments deal with Starbucks Corp. had an immediate negative effect on rival payments companies, and barely a week later Square announced a pricing change that might further undermine its competitors.

Now payments providers are beginning to piece together how they can ride this wave instead of getting crushed underneath it.

Starbucks is a particularly strong partner for any mobile-payments company because its homegrown mobile wallet, which is tied to a closed-loop Starbucks card, has grown more rapidly than many of the mobile payment systems the financial services industry has spawned.

And although Square is not the first company to woo merchants with a 0% per-transaction fee, the company's recent fame from its Starbucks partnership makes its offer a lot more visible to merchants than anything its rivals are pitching.

Intuit Inc. expresses optimism that it can benefit from the fresh attention Square is bringing to smartphone-based payments, but it doesn't have a match for the product that's at the heart of the Square-Starbucks deal: the Pay with Square mobile wallet.

"Our focus is to solve the most important needs of small businesses" with software such as QuickBooks Point of Sale, says Chris Hylen, vice president and general manager of Intuit Payment Solutions. "This may not be as sexy as a frappuccino, but this is what small-business owners truly need to run their business."

This year, Intuit began integrating QuickBooks Point of Sale with its smartphone-based card reader, GoPayment.

There is room for multiple approaches to mobile payments, Hylen says. He estimates that only 10% of the market is tapped at this time.

"Deals like [Square and Starbucks] help generate more enthusiasm and awareness for mobile payments as a category and [will] create faster growth opportunities for all of us," Hylen says.

Dan Wagner, the CEO of mPowa, a London-based mobile payment provider seeking to enter the U.S. market with a card reader similar to Square's, says Square's new pricing could lure slightly larger merchants than the company's current clients.

Square announced Aug. 16 that merchants could qualify for a 0% per-transaction rate if they pay a flat $275 a month to Square for up to $250,000 in transaction volume a year.

This pricing makes the most sense for merchants that near that limit, Wagner says, but "this would not be an attractive option" for the smaller merchants Square already serves.

However, the Starbucks partnership "is a payments-industry game changer, " he says. That news "tells the whole world that this form of payments is here to stay."

Terminal maker VeriFone Systems Inc. was quick to respond to its stock price tumbling 11% in the immediate wake of last week's Square announcement. VeriFone's stock received a downgrade the same day. 

In an e-mail statement citing earlier interviews from CEO Doug Bergeron, VeriFone said it encourages investors who were quick to sell its shares to take a long view of the company's business. Bergeron said he expects clients to come to VeriFone for their mobile-payment needs because of their existing relationship with the company.

Executives from terminal maker Ingenico SA, another company that saw stock prices slide initially last week, were not available for comment. Square also did not make an executive available for comment.

VeriFone's stock prices slid right away because any big news in mobile payments signals that more transactions are eventually going to be taken away from traditional payment terminals, says Gil Luria, analyst with Los Angeles-based Wedbush Securities.

"Square payments are away from the terminal, and PayPal payments are away from the terminals," Luria says. "Investors view terminals as less important, but VeriFone terminals will still be around and they are involved in mobile payments."

Earlier this year, VeriFone announced its terminals would support the Near Field Communication technology behind the Isis mobile wallet. Isis is a joint venture of the major mobile carriers; it is set for testing this summer in Salt Lake City and Austin, Texas.

Between Square's major announcements, major retailers announced their plans for a mobile wallet called Merchant Customer Exchange. 

It would be a mistake to overlook the significance of merchants establishing their own mobile wallet and marketing channels, essentially giving consumers only one mobile wallet and store brands application to download that would work at numerous retailers, says Richard Oglesby, senior analyst and mobile pay expert with Boston-based Aite Group.

The Square deal may open doors for all mobile payment companies, but merchants may be more focused on controlling their customer transaction data rather than allowing companies such as Square, PayPal or Google Inc. to obtain that important information.

"Google could turn right around and sell that data to a competing merchant," Oglesby says.

Square may soon have the tables turned if Apple Inc. announces its own initiative. The iPhone maker is expected to announce new hardware just next month.

"What if Apple decided it liked the merchant wallet concept and wanted to be the technology driver behind such an initiative?" Oglesby asks.

Correction: An earlier version of this story cited an emailed statement from VeriFone CEO Doug Bergeron. Although VeriFone provided these comments by email, they came originally from an interview with CNBC.