Square: Is Mobile Payment Firm the Next PayPal?According to Sarah Lacy and Mike Arrington over at TechCrunch, mobile payments startup Square just got a new round of funding and a snazzy new valuation of $200 million. The company's rise is being fueled by a broader wave of change, as smartphones invade the traditionally terminal-based credit card transaction processing market. But at lest part of Square's new high price tag is likely the result of the halo effect provided by its founder, Jack Dorsey, who also co-founded a little company called Twitter.

Here's the backstory on Square: For small stores, farmers market stalls, or even service providers, Square makes it much easier to accept credit cards. It provides a nifty dongle credit card swiper that can easily plug into devices running Apple's (AAPL) iOS software or Google's (GOOG) Android operating system, and the software to run it. The system is ideal for merchants who want to stop renting a terminal infrastructure. Square also radically simplifies the transaction process by providing a one-stop-shop for all services, including payment gateways and other intermediary items that are sold separately in many cases by other providers.

At present, Square is more a play on convenience than a true bargain. Its rates are decent, but not earth shattering. Based on its transaction fee rate of 2.75%, if reported tallies of around $1 million in daily transactions processed are true, Square is pulling in revenues of less than $30,000 per day. That adds up to about $11 million per year, which means Square probably isn't profitable yet, considering that it has a swarm of highly-skilled employees who must be earning decent money.

Many of my friends who have looked at Square are convinced the company is leaving heaps of cash on the table by refusing to introduce a low-low fee -- say, 0.5% or so -- for personal transactions. To date, it has been impossible to use your credit card to pay your friends or share expenses. Sure, you can ask a restaurant or a hotel to split a bill, but that's clunky and not always comfortable. Inexpensive personal money transfers are a huge potential market, as PayPal proved by turning the market for person-to-person transactions into one of the huge successes of the Internet era.

But there's one more big factor to be concerned about: While Square is doing something nifty, it isn't doing anything that PayPal couldn't -- or isn't already starting to -- replicate. All of that said, the $200 million valuation looks pretty good, considering how nicely the revenue scales and how clean the old-school monetization model for Square is. Unlike many new hot Internet startups, Square knows exactly how its going to get paid, and that should be worth a whole lot.


Increase your money and finance knowledge from home

Investing in Startups

The lucrative and risky world of startups.

View Course »

What is Short Selling?

Make a profit when stocks prices fall.

View Course »

Add a Comment

*0 / 3000 Character Maximum

2 Comments

Filter by:
Jewish Music

Square has other issues other then high rates. If you process larger amounts (over $200 or so)they will hold onto your fund for 30 days. If you are serious about processing credit card you need a traditional merchant account. The problem is few are honest about their pricing and will attempt to lock you into a contract and hit you with hidden fees. One of the few companies that advertises no contract is http://www.PrestigeMerchantServices.com.

January 07 2011 at 11:01 AM Report abuse rate up rate down Reply
sheel

It seems that Square is often (usually) going to be more expensive than a merchant account, so I see it making sense for the really small businesses, but once you get any substantial amount of sales, you'll want a real credit card processor. Here's a site that makes it easy to compare and tell you whether or not to use square: http://feefighters.com/square-calculator
They also offer reverse-auctions to find your processor, which is pretty cool...
http://feefighters.com

January 03 2011 at 10:24 AM Report abuse rate up rate down Reply