Money Squared: The Digital Wallet

By Samuel Greengard  |  Posted Monday, October 01, 2012 15:15 PM

By Samuel Greengard

Despite Google, PayPal and Apple all making a play for some combination of e-money, e-tickets and e-boarding passes, there's still no way to avoid carrying an old-fashioned billfold brimming with paper and plastic.

But, slowly and inexorably, we're creeping toward a digital wallet. What's intriguing is that a relatively unknown player in the financial service arena is driving much of this transformation. The company is Square.

You may have noticed one of these small plastic devices attached to an iPod Touch, iPhone, Android phone or an iPad at a restaurant or store. Heck, you may have seen your neighbor using one for a garage sale.

Square Card Reader, which connects to a cellular or WiFi-enabled device via an audio jack, is suddenly as hot as, well, flapjacks. Already, the upstart payment firm is processing somewhere in the neighborhood of $6 billion in transactions per year, and about 2 million people are paying through the system.

The appeal? Merchants pay a 2.75 percent fee per transaction with no monthly charge, compared to a standard credit card rate of 3.5 percent with a 15 cent transaction fee. More importantly, those who install a Pay with Square app on their mobile devices can link to a credit or debit card and leave their wallet at home.

At checkout, your name and photo appear on the merchant's POS system. The cashier has you digitally sign and you receive a receipt via e-mail or text. In fact, merchants can automatically identify Pay with Square users when they walk into the store or restaurant.

And there's no need to take the phone out of your pocket to pay. You can view all participating merchants via the app on your phone, and you also can receive coupons and incentives.

The concept is appealing enough to Starbucks that the coffee giant invested $25 million in Square in August. Starbucks plans to use Square to process all debit and credit transactions at its stores.

Square isn't alone. Google, PayPal, Isis and Microsoft—as well as startups like GoPago—are clamoring for a chunk of the pie. Forrester Research predicts that 30 percent of mobile device owners are willing to use mobile payments, and the market is accelerating rapidly.

Once consumers and merchants realize that mobile payments could spell the end of POS lines and could also transform marketing—including loyalty programs—expect a stampede to the digital wallet. At that point, we'll all cash in.