Square is reinventing mobile payments, could it make NFC-enabled smartphones obsolete?

Enabling payments everywhere. That’s the goal of Square, a San Francisco based company started by Jack Dorsey, the co-founder of Twitter. The solution uses a small credit card reader plugged into your iPhone and the Square iPhone app to accept payments from any credit card without the need to setup any merchant bank accounts. In addition Square also provides a point of sales terminal through your iPad and a loyalty and rewards systems. The video below gives a nice introduction how it works.

The end of physical credit cards

This approach itself could already be the basis for a viable business but Square didn’t stop there. It has recently introduced Square Card Case that eliminates the need for credit cards completely if you have an iPhone.

Square Card Case users provide their credit card information inside the iPhone app  and they can then pay merchants that use the Square terminal without physically handing over their credit card. All the merchant needs is an iPhone or iPad and according to Square already more than 800.000 square readers have been shipped to merchants across the United States.

The technology behind this is quite straightforward: Square Card Case uses the iPhone’s iOS 5 geofencing feature that allows to create virtual fences around certain geographic locations. Whenever you are paying with your Square Card Case, Square will check with your iPhone if you are indeed within a certain geographic range of that location. So you can only be charged if you are actually in that location and if you have allowed the merchant to charge you automatically.

The key advantage of this approach is that Square has full control of both sides of the market: the customers and the merchants. This allows the integration of  loyalty programs for merchants, PoS systems, location-based services and many more services without the need to rely on other actors in the payment industry.

The fact that Square provides a fully integrated payment solution that covers both customers and merchant could be the decisive factor to dominate the mobile payments space.

Can NFC-based payment solutions compete against Square?

One vision of the mobile phone industry is  to put your wallet into your smartphone and the answer seemed to be NFC-enabled smartphones that are waved over a NFC reader to pay. But waving your smartphone is not that much different than handing over your credit card to the cashier. There are certainly improvements in security and speed but the improvement is incremental, not radical.

The biggest challenge I see with NFC-based solutions is that there are so many actors involved (smartphone manufacturers, credit card companies, carriers, PoS companies) and committees like this usually take forever to reach any decisions or to gain momentum for a wide-spread adoption of NFC. In addition, the biggest player in the mobile industry has most probably no interest in NFC-enabled smartphones. Apple wants to sell more devices and control the complete customer experience. A solution like Square is the perfect answer to this goal and through an integration with your iTunes account (and therefore your credit card) we could get to a stage when you could “pay with Apple”.

It’s an exciting time to observe the dynamics in this market and once again it is a race between a tightly integrated but proprietary solution (Mac OS, iOS, Square) and a loosely integrated but standardized solution (Windows, Android, NFC).