Replacing cash with a phone


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‘I don’t have any cash on me’ may no longer be a valid excuse with the arrival of credit-card readers that can be used with mobile phones.

In a potential boon to street vendors, mom-and-pop shops and those who just want to lend a few bucks to a friend, several companies have rolled out ways to use cellphones to process credit-card payments instantly.


Square, a brainchild of Twitter Inc. creator Jack Dorsey, enables anyone to accept credit cards using a tiny white attachment and software that can be downloaded to a smart phone.

‘The future has arrived,’ tweeted Mayer Hawthorne, a singer and songwriter who used Square to sell his CDs and merchandise while on the road.

The plastic card reader plugs into the headphone jack on an iPhone or Android-based phone and interfaces with the phone’s software, then the transaction is processed through Square’s secure servers. Apps for the Palm Pre and BlackBerry are said to be in the pipeline.

After swiping the card through the reader, the buyer signs for the transaction by using finger strokes on the touch screen, then can type in an e-mail address where a digital receipt will be sent. Square charges a fee of 15 cents and 2.75% of the transaction amount to the person processing the credit card. That would amount to 42.5 cents for a $10 purchase.

‘People are tickled by signing their names with their fingers,’ said Sue Moore, co-founder of Let’s Be Frank, a hot-dog vendor that sets up shop on Glendale Boulevard in Silver Lake every Thursday. The business recently began accepting credit cards for the first time using Square, and Moore said it’s simple to use.

In much the way he launched Twitter, the social-networking site that has grown to more than 100-million users, Dorsey is giving away the Square device. Anyone can sign up for an account at, and the company will send the device in the mail.

A version of Square for the iPad is also available. It enables store owners to input and track inventory and handle cash transactions, replacing pricey point-of-sale cash registers and terminals.

Those features eventually will make their way into the Square’s cellphone software, Dorsey said.

Intelligentsia Coffee & Tea Inc. plans to begin using Square-enabled iPads for its mobile coffee carts, said Matt Riddle, the company’s technology manager. If that works, Square could replace the chain’s cash registers. ‘That’s one thing we would love to pioneer in the coffee-shop realm,’ Riddle said.

Traditional payment-processing firms also are stepping up marketing of phone-powered payments.

VeriFone Systems Inc., the biggest manufacturer of credit-card terminals, has introduced PayWare. The card swiper fits around an iPhone or iPod Touch.

With PayWare, the company is broadening the merchants it targets to include more casual sellers. But VeriFone isn’t going after the average Joe. Most PayWare transactions exceed $100, said Chief Executive Doug Bergeron. New Square users often start out with a daily transaction limit of about $100, which can increase over time in a process similar to building credit score.

‘The Squares of the world are going to move nickel-and-dime transactions away from the change in your pocket,’ Bergeron said on the phone Friday. ‘The sub-$100 guys are also the highest risk. The smaller the transactions, the higher the risk.’

Intuit Inc., maker of financial software Quicken and Mint, offers GoPayment. The system is designed for older cellphones and BlackBerry devices and offers a pair of peripherals for wirelessly swiping cards and a belt buckle that can print paper receipts.

At 1.7% with a card or 2.7% when manually entering a card number, GoPayment has cheaper rates than Square and PayPal. But, like PayWare, merchants are required to pay subscription fees.

‘People are moving away from cash more and more,’ said Mary Lunneborg, GoPayment’s senior product manager.

Both VeriFone’s and Intuit’s systems may appeal more to mid- to high-volume merchants, who require expensive hardware.

‘They’re providing a hardware and a software solution, but they’re not providing the ease of getting into it,’ said Dorsey, Square’s founder, during an interview at a coffee shop in New York recently, ‘which is really the sticking point.’

Although the Square gadget is small enough to fit in a pocket, it’s not a requirement for taking payments. Users can manually punch in a credit-card number, but the transaction fees are higher.

To avoid the credit-card tolls entirely, PayPal Mobile has come up with an app that works on iPhone, Android and BlackBerry phones. With the app pulled up on both phones involved, the amount of the transaction is input on the payer’s phone. Money changes hands by physically bumping the two phones together. Both users must be PayPal members with profiles tied to bank accounts, or you get socked with fees that are higher than Square’s.

Whereas Square looks to replace cash eventually, PayPal has a loftier goal -- to kill the wallet and the credit cards inside of it.

‘We see the evolution as being ‘the wallet in the cloud,’ ‘ said Osama Bedier, PayPal’s vice president of platform and emerging technologies. ‘We think mobile is going to redefine commerce and not just e-commerce.’

PayPal, thanks to its tight integration with parent company EBay, has seen a major boost in cellphone transactions. The company went from $25 million in 2008, when it released an iPhone app, to $141 million a year later. A recently overhauled version of the PayPal app was downloaded a million times in the first three weeks it was available.

Though Apple offers app developers the ability to tap into more than 100-million credit cards that it has on file through iTunes for e-payments, PayPal recently began letting mobile-app makers access its 220-million accounts as an alternative payment method.

But the credit-card giants aren’t ready to roll over just yet. Both Visa and MasterCard are working on mobile payment solutions, such as paying at checkout by waving a cellphone in front of a terminal or transmitting money digitally. Visa is partnering with DeviceFidelity to bring that functionality to the iPhone by embedding a wireless chip in a case designed for Apple’s phones. These financial titans have the advantage of being established and trusted.

For start-ups like Square, getting consumers to trust them with their banking information can be a challenge. Venmo is an online service where a user can authorize friends to take money from his or her account without needing approval.

‘How often has someone owed you money and not paid you back right away?’ wrote co-founder Andrew Kortina in what sounded like the standard pitch. ‘It can be awkward to ask them to pay you back. If they trusted you on Venmo, you could just charge them for whatever they owe you and settle the debt right away.’

‘It can sound a little scary,’ Kortina admitted in the e-mail, but ‘trust takes a lot of the stress out of transactions.’ Users have a 24-hour window to decline transactions from money-grubbing buddies.

That fresh blood can sometimes work to their advantage, bringing new ideas to the table, as Dorsey notes.

‘We’re being somewhat naive in our approach,’ Dorsey said. ‘What’s interesting about doing anything new is that you kind of approach the whole situation with a beginner’s mind.’

But when websites like Blippy, a place where exhibitionists voluntarily publish all of their credit-card purchases online, have slip-ups involving accidental card-number disclosures, similar start-ups can find it harder to gain traction.

So Square said it had taken extra measures to protect personal information, including using a sophisticated encryption program.

Square’s system also charges users a flat fee per transaction -- despite credit-card fees being somewhat unpredictable -- to reduce confusion for users. ‘We’re also handling all the risk and fraud potential,’ Dorsey said.

‘We’re definitely putting ourselves at a cost risk,’ Dorsey said. ‘And we’re taking a bet.’

This is a longer version of the business story ‘Devices turn cellphones into credit card processors’ that appeared in the Monday edition of The Times.

-- Mark Milian