Square Inc. began last week to take the wraps off its new cell phone payment system.
The company has been attracting attention in the blogosphere since May, when word first emerged that Jack Dorsey, better known for founding the popular Twitter Inc. microblogging service, was exploring a mobile phone payment technology.
Square's Web site went live last week, and Dorsey gave interviews to the TechCrunch blog and the Los Angeles Times. TechCrunch described the introduction of the payment system as an ongoing "private beta."
The Square system uses a cubical card reader that attaches to the audio jack of Apple Inc.'s iPhone.
Though the product appears to be designed for merchants, Square's initial marketing push has focused primarily on how consumers can use it, sometimes even casting its device as a person-to-person payment system. Merchants, however, get little information from those articles or Square's Web site on how the device is set up or what it would cost.
As such, observers have come to see the system as more flash than substance. They say Square ignores pertinent business details — such as whether it adheres to the Payment Card Industry Data Security Standard — to instead talk up Dorsey's success and the allure of the iPhone.
"The play here that's interesting is: 'We have an app for that,' " said Brian Riley, a research director in the bank cards practice at the research firm TowerGroup in Needham, Mass., a unit of Corporate Executive Board Co. "But in the same token: Do you have a PCI-compliant app for that?"
The PCI standard, which governs how companies must protect any payment data they handle, is no trivial concern, he said. The card brands can penalize companies that cannot show that the technology they use meets those guidelines.
Square did not respond to repeated interview requests from American Banker.
Riley said he attempted to sign up online with Square as a merchant, but all the Web site allowed him to do was join a mailing list. Providers of competing technology make it easier for merchants to sign up directly from their Web sites, he said.
Aaron McPherson, a research manager for payments at the Framingham, Mass., research firm IDC Financial Insights, said he took issue with the Web site's promise that the Square device could be used to process payments without having a merchant contract.
"Without any contract, how do you know that the money is going into your bank account?" he said. Further, using such a system without a firm relationship with the vendor is likely against the card brands' bylaws, he said. "MasterCard and Visa won't let you do it."
McPherson said he has reached out to Square but has not heard back. That Square has not been more responsive to industry analysts or media is telling, he contended. "I wouldn't go so far as to say there's some deep dark secret they're hiding," he said, but "I think it means they're a long ways off from having a real product," and are more interested in generating early buzz.
Beth Robertson, the director of payments research for Javelin Strategy and Research of Pleasanton, Calif., said that if Square is able to allow merchants and consumers to accept card payments without a conventional merchant account, that may be a bigger selling point for the system than the technology itself.
"There are some solutions that are similar that are available from merchant acquirers," she said. "The difference here is it appears that one does not have to go through the normal qualifications that a merchant acquirer requires for a merchant to accept cards."
Robertson said that she is not aware of any vendor today that is able to sidestep the normal requirements for card acceptance.
Though Dorsey has said in interviews that the device itself may be given away for free, the pricing of the service is unclear.
McPherson said: "I'd expect that that would be higher than the lowest rate on a merchant account. They really can't charge less than standard interchange" and still expect to make money.
Moreover, merchants that need to take payments on the go already have multiple options. Riley suggested First Data Corp.'s FD50 handheld card reader, and McPherson suggested ProPay Inc.'s MicroSecure reader. Robertson suggested Merchant Warehouse Inc., which sells wireless terminals and a virtual terminal that can run on an iPhone or Research In Motion Ltd.'s BlackBerry.
Companies as diverse as the card processor Total System Services Inc. and Intuit Inc., the maker of the small-business accounting package QuickBooks, also are offering mobile card acceptance systems.
According to an online video demonstration of Square posted by the TechCrunch blog, a merchant taking payments on an iPhone would swipe a card on the square device, then ask the consumer to sign on the iPhone's screen with a fingertip. The consumer can also type in an e-mail address to receive an electronic receipt of the transaction.
The system is also a person-to-person play. Dorsey told the Los Angeles Times' "Technology" blog that the device could be used to split a dinner check among friends — an example observers have tired of hearing from P-to-P start-ups.
"You and I go out to dinner, we want to split the check, [so] I take out my iPhone and I swipe your card — we're not that good friends if we're doing that in the first place," Riley said.
McPherson said that besides the dubious utility of the dinner check example, there is little business reason for Square to explore that space.
"I don't really understand why everyone's so obsessed with this P-to-P thing," he said. "There's no money in it," in contrast to the business-to-consumer space, which he said "is much more promising."
Even Twitter, the highlight of Dorsey's resume, has followed this path, McPherson said.
"Twitter is much more of a business-to-business thing at this point, or business-to-consumer," he said. "If you look at the top Twitter tweeters, they're all media publications or analysts."
McPherson suggested the confusion around Square's function, pricing and market are an effect of its marketing effort. He believes the company hopes to tantalize its audience with an air of mystery, and though this strategy may work for consumer electronics, it will fall flat with merchants, he said.
"The revenue for this is going to come from merchants, and businesses are not going to want a 'mysterious' product," he said.
