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New System Swaps the Cash Register for an iPhone

Some experts doubt that startup Square can succeed.

Square, a new startup based in San Francisco and headed by Twitter cofounder Jack Dorsey, opened its doors amid much hype and fanfare last week. But some experts are already questioning whether the company will be able to sustain itself.

Card accepted: Square, a startup company, has created a system that allows credit card payments via a cheap piece of hardware, shown above, that plugs into a smart phone’s audio jack.

The startup hopes to make it make it big by allowing virtually anyone to accept credit card payments by connecting a simple reader to a mobile device. Dorsey, Square’s CEO, envisions the technology being used by small businesses, street vendors, and even individuals who want to sell a couch on Craigslist or collect money from a friend.

However, some experts question whether the device will find a niche in the mobile payments market and say the startup will face a challenge trying to win consumer confidence with such a novel approach. “In retrospect, PayPal’s biggest innovation was putting together a system to protect both their users and themselves against fraud,” says Charles Kahn, a professor of finance at the University of Illinois at Urbana-Champaign. “Before a system like this has any effect on consumer behavior it will have to convince consumers that their cards are protected.”

To take a payment with Square, a user swipes a credit card’s magnetic stripe through a small reading device that plugs into a phone’s audio jack. The reader is currently compatible with the iPhone, but Square is working on versions for Android and Blackberry phones. Dorsey says the device communicates through the audio jack because it’s cheaper to manufacture that way and because it should allow Square’s technology to work on a wider variety of mobile devices. After the card is swiped, the user submits his signature using the touchscreen. And if the user chooses to enter an e-mail address, the system will send an electronic receipt.

Only the person who is receiving payment needs to have an account with Square, and the company hasn’t yet set a pricing structure. But Dorsey says the pricing will allow for different levels of customer involvement. Someone who wants to use the service once for a yard sale should be able to get started easily and cheaply, while a small business might upgrade to a more full-featured version of Square.

“The credit card stack is quite complicated,” Dorsey says. “We tried to find a simplest path to the parties who really need to be involved. We’re taking a lot of the upfront cost away from the process.”

Dorsey notes that Square uses encrypted protocols to send transaction information, and doesn’t store card information on the seller’s device. The device is subject to the same regulations as any other payment system.

Paperless trail: Square can send receipts by e-mail and SMS. Merchants can choose a charity to receive a portion of each transaction fee.

By creating a Square account, payers can obtain extra features, too, Dorsey says. For example, a user can arrange to receive a text message every time his credit card is charged using Square. Or he can upload a picture that will display to the seller whenever the user’s credit card is swiped. “We put a big focus on how to get the payer involved in managing security,” Dorsey says.

Still, some experts are skeptical of Square’s prospects. Jon Paisner, a senior analyst at Yankee Group who studies mobile transactions, says the need to plug in an extra piece of hardware to use Square might prevent people from adopting it. Paisner also worries that the device won’t be sturdy enough in the long-term, and that audio jacks may not stand up to this kind of unintended use.

Paisner thinks there is potential for payments via mobile phones to take off in the United States and United Kingdom, but he thinks near-field wireless communication technology, which would allow users to make payments by tapping a phone against a reader, is more promising.

Mark Beccue, a senior analyst at Abi Research who studies consumer mobile technology, also has reservations. “What puzzles me is, what market we are addressing here?” he says. “I saw a video of using [Square] in a coffee shop and thought, ‘Don’t they have a cash register?’ ” Beccue concedes that the product may work for certain niches, such as markets or art fairs, but he doesn’t think it has mainstream appeal. He suggests that most small businesses will prefer traditional point-of-sale systems for managing credit cards, and that ATMs are convenient enough that individuals aren’t likely to turn to Square to pay each other.

Pilot tests of Square are being conducted in San Francisco, Los Angeles, New York, and St. Louis. Dorsey says the company hopes to open to the public in early 2010.

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