Square Inc. faces a new cast of challengers in its plan to spark consumer adoption of mobile payments after muting many critics of its merchant technology.
While Square isn’t the first startup trying to bypass hardware limitations that have prevented mobile payments from gaining traction at the cash register, its marketing prowess, large financial backers and steadily growing base of retailers could give PayPal — one of the big contenders Square will have to beat — a run for its money.
PayPal and Square have “certainly discovered that the formula for pushing out new payment methods is through the merchants by filling the need that merchants have,” says 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.”
Unknown is whether Square’s new service, called Card Case, will gain long-term favor among consumers given some of its limitations: It currently only works at merchants that are also using a new Square card processing application, Square Register, for the iPad. Currently only 50 merchants are using the service nationwide.
And while Card Case aims to create a better experience for consumers and retailers by eliminating the need for a customer to hand a credit card to a cashier, the service and other existing “digital wallet” apps in many ways are trying to improve a process that, at least from a consumer’s perspective, 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,” says Brad Strothkamp, a principal analyst at Forrester Research Inc.
“There’s really no pain for me to swipe my card and in terms of handing it over to the merchant, yes, there’s the concern about somebody stealing my number … but I don’t think from a customer perspective that is enough of a benefit to win them over.”
Regardless, payment networks like Visa Inc. and MasterCard Worldwide, wireless carriers including AT&T Inc. and Verizon Wireless, large banks, 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 set its sights on services that rely on Near Field Communication technology embedded inside of mobile phones and payment terminals that would enable a consumer to wave their phone to pay for transactions.
But such systems face big barriers, including getting merchants to invest in new hardware, getting NFC-compatible phones in the market and solving business issues surrounding who owns and manages the customer relationship.
To bypass such issues, companies like Square have chosen to go to market with services that work mostly with existing hardware.
Card Case is a feature that works with the existing iPhone and Android apps that Square has released. To use it, a consumer must pay for a transaction with a credit or debit card at a merchant using Square’s new Register app, a digital cash register of sorts the company also announced March 23 for the iPad.
After using a payment card at a merchant that uses Square Register, consumers may receive a text message invitation to install Square’s app on their smartphone. The app links with the card that the consumer initially used at the merchant, allowing a customer to apply future transactions at any Square Register merchant by clicking a button in the app.
The app also asks a consumer to upload their photo, which along with the customer’s name also appears on the merchant’s iPad app when a customer uses it at the point of sale. The purpose is to help verify a customer’s identity during the checkout process. 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,” says Aaron McPherson, a practice director with IDC Financial Insights in Framingham, Mass.
Sam Penix, the owner of Everyman Espresso coffee shop in New York, is one of the 50 merchants that Square launched its Register service with. Until he began using it two weeks ago, Everyman Espresso did not accept card payments.
“They really made it affordable for us to start to accept credit cards, which was something I saw in our future but not necessarily our immediate future due to the swipe fees that normal merchant services charges,” Penix says.
Penix sees value in the Card Case for “places like me where we have a huge percentage of our business that relies on regulars,” he says.
“Figuring out how to speed up their transaction process is always something I’m thinking about, so I think it’s kind of cool for that reason,” Penix says.
The Card Case feature is currently available for iPhone and will later be available for Android devices.
Square is not the first company to use apps to conduct in-store payments.
ProPay Inc., a payment gateway operator, has tested a service called Zumogo that allows a customer to store a payment card in a mobile application enabling them to apply future charges to it at participating merchants. PayPal, a unit of eBay Inc., in April announced it had acquired a startup called Fig Card with a similar service.
Anuj Nayar, a spokesperson for PayPal, declined to comment on Square’s service specifically but reiterates PayPal’s plans to expand its mobile services to physical merchants.
“We will be trialing [at the] point of sale by the end of the year,” Nayar says, declining to provide specific details. “Right now we think people are missing a major point of getting into the physical point of sale. It has to be better and easier than the current system.”
Nayar adds that PayPal’s service “will look significantly different from what we’re currently seeing out in the market.”
Think Computer Corp. has rolled out a mobile payments service called FaceCash to about 20 merchants in the Bay Area that allows consumers to load funds into a mobile account. They use the account to make purchases at FaceCash merchants, which can verify a customer’s identity by seeing a photo of the customer that appears when they scan a barcode at the point of sale.
Aaron Greenspan, Think Computer president and chief executive, says the company is trying to expand the service’s usage by working with terminal makers to integrate its software into their existing hardware.
Greenspan says FaceCash could be attractive to both traditional retailers that already accept card payments as well as smaller merchants that do not accept cards, the market that Square has focused on most. However, he acknowledges that marketing has been a challenge.
“There’s no question that’s an issue,” Greenspan says. “In terms of solving the problem, I don’t have a magic solution but I think what it comes down to is you’ll probably see us work with some kind of larger partner that has more marketing partners.”
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