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Payment systems: All square at Square

Editorial Staff

Mobile payment systems provider is facing a nice day as venture capitalists value the little business at some USD1,000 million.

Square is a media darling and that goes a long way to giving it a healthy price tag. The buzz surrounding the neat device and payment processing system is startling, even by tech industry standards.

It's not exactly ground breaking in what it does (use a mobile phone as a method of taking credit card payments) and it's by no means the only product in the market.

But it does have, perhaps, the cutest hardware that matches nicely with a white iPhone.

And it does have one of the best merchant transaction structures which, for small businesses at which it is aimed, is a serious attraction: no monthly fees, no contract, no minimum per-month values and a standardised 2.75 commission. Better yet, payments are credited to the merchant's bank account the next day - a far cry from the delayed payments of many processors and a huge advantage to cash-flow hungry SMEs for whom factoring (or similar) is the only realistic option.

It's cross-platform: Android, iPhone and even iPod Touch and iPad.

The device is universal across all phones: simply plug the little square thingy into the audio-out jack of the phone.

The universality means that the device can be taken to tables in cafés, used on the road by taxi drivers and by delivery drivers for COD payments.

Just like UPS, users hand their device (the whole phone) to customers who sign on the screen and, if they input their e-mail address, sends them an invoice to print out back at base. Customers can even add a tip when they sign, if they wish.

With a back-office function including itemised sales reports, even high-throughput usually cash-intensive businesses like coffee shops can maintain a greater visibility over their business without investing in expensive POS systems.

So what are the downsides? First is the competition: the concept of payments cleared by mobile is several years old but most models have not made much impression on the market, largely because they have been dependent on the phone for much of their technology. That is a plus for Square but it does mean that at least some of the potential market is sceptical and, in the worst cases, have invested in a technology that has become obsolete and a costly relic.

Secondly, and potentially much more of a threat, is the idea of phone-to-phone or phone-to-POS payments by tapping in a way similar to Visa Wave. The tech is new and not widely used but it has a convenience factor that is well on the way to being a wallet.

But the biggest threat will come from a convergence of thinking (but not of technology). Remember Mondex? Once someone works out how to beam currency from one phone to another, like Mondex but without the need to use external devices, then the phone will become a true wallet and small payments will be easily made. Some Telcos are already well on the way to that with intra-system balance transfers (see DIGI in Malaysia, for example).

When regulatory hurdles as to e-currency are ironed out, the phone will take over from many pre-paid smart cards such as Hong Kong's Oyster card.

That will leave Square dealing with transactions that exceed, for example, USD100 (a guess as to the regulatory limit that will be placed on anonymous transfers - currently, there is no such limit on Mondex transfers which are also anonymous).

If there is a guess as to where that innovation will come from, it's probably from the non-government backed currency sector. And that, currently, means something like BitCoin.

But the biggest hurdle for Square, right now, is much more basic: the USA may be a big market but it's not the only market and Square is only available in the USA.

If the VCs that are reported to be about to flood the company with money (a reported USD100 million for a minority stake) want to stay ahead, they are going to have to broaden that market before a competitor or an alternative becomes entrenched in e.g. China and South East Asia.