Square Encircled as Apple, PayPal Aim for Mobile Payments

Jack Dorsey founded payment startup Square Inc. with a mission ofrethinking the way people buy and sell stuff with their mobile phones.

Rising competition may get some merchants to rethink using Square.

Consider Fabrice Yopa, who used Square to collect payments for his online-video business. Yopa ditched the service a month ago, saying he’s fed up with how Square handled $4,000 in frozen subscriber payments.

“We’ve never had these kind of problems with any other companies we use, including PayPal,” Yopa said. “I would not recommend Square to anybody.”

With today’s debut of Apple Pay, a service that lets shoppers buy goods in stores using Apple Inc. (AAPL)’s iPhones, and the coming spinoff of EBay Inc. (EBAY)’s PayPal, more Square customers could be lured away by rival services that offer lower fees, easier transactions and a deeper pool of buyers and sellers.

The stiffening rivalry among Square, Apple, PayPal and other payment-technology providers -- all betting on a future when digital wallets replace cash and credit cards -- reflects the rising stakes in a market that EMarketer Inc. estimates will be worth $118 billion by 2018, from $3.5 billion this year.

Square, co-founded by Twitter Inc. Chairman Dorsey, was one of the first companies to introduce technology that turns smartphones and tablets into credit-card readers. While Square appealed to smaller merchants seeking an easy way for customers to pay for goods and services, the startup is seeking to expand into bigger retailers.

Square Up

The key question is whether almost $600 million in funding over five years has given Square enough of an edge to fend off rivals, according to Scott Jacobson, managing director at Madrona Venture Group in Seattle.

“Square is going to have to figure out how to live or die on its own means,” Jacobson said in an interview.

To do that, the company will have to keep customers like Leighton Morrison happy. Morrison said he signed up with Square to collect $3,000 in payments for a rental property, only to have the company freeze his funds, even after he sent documents to prove his identity and receipts of the transaction.

“I would never recommend them,” Morrison said. “It’s impossible to get someone on the phone.”

A key challenge for all payment providers is to balance the need to serve customers quickly while complying with regulations and credit security.

“Holds on funds are extremely rare -- a fraction of a fraction of a percentage point -- and may occur when we need additional information to protect our buyers and sellers from potential chargebacks, high-risk transactions, or violations of our Terms of Service,” said Aaron Zamost, a spokesman for Square.