Visa gets behind mobile payment startup Square

The backing could mean good news for the industry, but questions remain over how users will be affected.

Square, a mobile credit card processing startup, received an undisclosed strategic investment from Visa, the world's largest credit card company. The investment is strategic because Square probably doesn't need the cash. The company was started in 2009 by Twitter founder Jack Dorsey, and recently closed a $27.5 million round of funding at a $240 million valuation.

Square builds a magnetic reader that plugs into the headphone jack of a smartphone. The company takes 2.75 percent of each sale. Apple recently began selling the card reader online, and in it's stores for $9.95. But users get a $10 Square credit when they sign up for an account and the apps are free. The company is adding about 100,000 local merchants a month, says Keith Rabois, Square's chief operating officer. In the first three months of this year, Square processed $66 million in payments, and it expects to triple that amount in the current quarter, he says.

But the new industry faces some hurdles.

Two months ago, VeriFone, which makes a competing credit card reader, wrote an open letter to consumers and the industry, warning users of a security hole in Square's hardware. The company denied the allegations, with many journalists pointing out the vulnerability of credit cards is a universal issue, and that Square's system is not uniquely insecure. Near Field Technology (NFC) for example, a similarly disruptive technology that allow users to make a purchase by only using their phone, is subject to similar security issues.

As with all emerging industries however, there are going to be problems. Square and VeriFone have to convince businesses--not to mention customers--that mobile credit card processors are safe.

Visa's investment and partnership will go a long way in assuaging those fears.

Transaction fees on credit cards vary widely across industry, and even from contract to contract. But if you're a business owner considering a mobile-swipe service, here is an interactive calculator that lets you compare rates from Square and VeriFone, based on average transaction size and monthly volume.

These services offer inexpensive, compelling alternatives to traditional credit-card systems. And while Visa's investment does offer needed validity and backing to the infant industry, business owners who use these services should be wary of too much meddling from the few big players, as it will undoubtedly prevent any real reduction of fees by the disruptive technologies entering a highly controlled industry. Square must proceed cautiously with its new backing, because such fees have kept many small business owners from jumping on the credit card bandwagon in the first place.

Ilie Mitaru is a culture and business journalist and occasional entrepreneur. He is the founder of an alternative business magazine, Stake, set to launch in June.

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Ilie Mitaru

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