Mobile payments startup Square just announced they're cutting the 15 cent processing fee other mobile payment systems collect--but are they poised to remake the credit card industry, or simply undercutting competitors in a bid to get ahead?
Square is just one of a number of companies trying to get in on the emerging mobile payments market and their announcement highlights the growing competition among a stable of rivals large and small that are vying to get a major foothold.
The change means that merchants using Square for credit card payments will pay only one 2.75% fee for charges, rather than both a percentage fee and an additional fixed cost. They also hope the move will provide greater transparency in an industry that can often have labyrinthine pricing structures.
Dropping the extra fee lets Square square off with competitors like Intuit's GoPayment and Verifone's Payware mobile, which charge 15 and 17 cents per transaction, respectively, and, Square hopes, will assist it in wooing smaller sellers.
"Dropping 15 cents may not sound like a lot," said Gwenn Bezard, research director at the Aite Group. "But when you're a small business, every dime counts."
Square is angling for an in with small merchants, such as the sellers at farmer's markets, that have typically relied on cash payments because of the expense of fees, or the hassle of getting through red tape. Square does not require a credit check for merchants who want to begin accepting credit cards, and is free to try, so that businesses can watch to see if their sales go up or down after beginning to use the service.
"There are 7 million businesses that accept Visa or Mastercard," said Keith Rabois, Square's COO. "We believe there are 26 million or more that don't accept credit cards at all--we're enabling people to become successful entrepreneurs."
While the company hopes to woo small businesses and entrepreneurs that feel the pinch from each extra payment, Square's elimination of the 15 cent fee may belie the squeeze of the competition.
"Square's starting to feel some of the pressure from the competitors--it means [mobile payments] is a real market and not just sitting in someone's closet," said Aaron McPherson, a practice analyst at IDC Financial Insights.
In addition to eliminating its fixed fee, Square recently kicked off an ad blitz that included large billboards in New York's Times Square.
Some analysts see Square's move as an attempt to face off with the more established forces of Intuit and Verifone, their main competitors in the mobile payments field.
"Square had an early advantage based on the buzz they were able to create," McPherson explained. "In the long run this is going to be a tough market--they're up against some very large entrenched competitors."
So will dropping 15 cents pave Square's path to success? They have gotten monumental buzz, partly due to the name recognition of co-founder Jack Dorsey, who helped start Twitter, and are competing in a field where no clear winner yet exists. But they will have to overcome the forces of a company like Intuit, who already have an in with businesses through their QuickBooks services.
Square recently completed a $27.5 million funding round, bringing its valuation to $240 million. Not only that, but Square has seen their growth rise from 30,000 to 50,000 signups per month in December, and is on pace for over 100,000 new signups in February.
"No one is really well established with mobile payments--it's an emerging market," said Bezard.
Watch Square's short video explaining the benefits of their system below: