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.
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.