When we first looked at Square, the mobile payments device that attaches to the iPhone, we were confident that this was more than a neat piece of technology looking for a solution. The device, found at retailer stores for about $9, allows anyone to swipe a credit card payment onto an iPhone (or iPad), and then use a free app to process a payment. PayPal announced their version of the product last week; it is certain these devices will become ubiquitous for small merchants and Person-to-Person payments.
While newcomer Square is a slight fraction of transaction volume, PayPal’s recent announcement to enter the mobile device acceptance market illustrates the potential of this new processing niche. PayPal, which has more than 100 million customers that transact in 190 global markets, will likely link this device into their long anticipated mobile wallet and will once again ensure strong transaction growth for branded payment cards. The firm provides online and offline processing to a wide range of merchants, from single proprietorships to global retailers. Total 2011 MasterCard and Visa transaction volume exceeded $9 trillion and we anticipate the two-payment brands will cross the $10 trillion mark in 2012.
PayPal constructed a business model 15 years ago, that uses components of the card process to function, but when possible routes payments itself by accessing funds on deposit or customer bank accounts.
We see three disruptive factors from PayPal’s entry into the market.
- PayPal is moving quickly from the virtual space to the retail point of sale. The new device puts them at the forefront, particularly focused on their sweet spot: small merchants willing to pay high-market prices for simplified connectivity.
- The new device flies in the face of MasterCard, Visa and Discover’s recent announcements to implement smart chip cards in the US by 2015, suggesting that PayPal might aspire to create its own competing network. It is not likely that a smart-chip-compliant device could be produced as cheaply as a product that utilizes the magnetic stripe.
- The new device socializes the cost of an acceptance device from several hundred dollars down to less than $10, which disrupts the pricing model of many card acquires that generate profit from leased terminals.
We shared our thoughts with USA Today last week when they broke the story and find that PayPal’s move will likely bring more competition; though not necessarily lower prices, to the card payments industry.