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Summary:

PayPal’s plans to announce a solution for small businesses at an event this Thursday includes a mobile payment dongle that would compete against Square and others, according to sources we’ve talked to. The dongle will allow small business owners to process credit card swipes.

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PayPal’s plans to announce a solution for small businesses at an event this Thursday includes a mobile payment dongle that would compete against Square, Intuit (intu), Verifone and others, according to sources we’ve talked to who are familiar with PayPal’s plans. The dongle, which might be shaped like a triangle, will allow small business owners to process credit card swipes from a smartphone, similar to Square, Intuit’s GoPayment and Verifone’s PAYware.

The potential move, part of a larger brand refresh, would fall in line with PayPal’s recent strategy to bring its payment services into physical stores. It’s working with a host of partners to bring its in-store system to bigger retailers including Home Depot, which is launching the service in more than 2,000 locations. That system relies on integrating PayPal software into existing point-of-sale terminals so users can pay either by swiping a PayPal pre-paid card or by entering in their phone number and PIN, which connects to their account.

The in-store system works ideally for retailers with existing hardware. But a mobile payment acceptance tool like Square would allow PayPal to target much smaller businesses with one or two locations and give them a simple way to process card transactions. Square has shot to success with its dongle and is now processing $4 billion annually. PayPal spokesman Anuj Nayar declined to confirm the news, saying: “We’re unveiling what we believe will be the future of commerce for small businesses.”

PayPal’s move into Square’s turf would sharpen the rivalry between the two companies. Square’s COO Keith Rabois, an early employee at PayPal, dismissed the threat from his old employer in an interview with GigaOM last year, saying its payment assets and fraud models were outdated. He predicted that Square would be more valuable than PayPal eventually.

“The brand has atrophied in the last decade and there are not a lot of users who wish they could use a PayPal account,” he said. “That may have been true a decade ago but not today.”

PayPal, however, has been ramping up its efforts to win the in-store battle and is increasingly confident about its chances. Don Kingsborough, who joined PayPal last year as its VP for retail and prepaid products, told me in an interview that in-store payments was PayPal’s to lose. Now, it seems like PayPal is making a play for the entire market, not just bigger retailers.

It’s going to be interesting to see how merchants respond, if PayPal follows through on this. PayPal has more than 100 million account holders and it’s a well known name for online payments. But its track record for in-store payments is thin. For small business owners, many may not naturally gravitate to PayPal for in-store payments. But a dongle solution, along with an app for merchants that allows them to take PayPal payments via a phone number, may be compelling for some merchants interested in tapping PayPal’s existing customer base.

PayPal hasn’t always been the favored choice of merchants but it seems to be working to improve its standing with them. It recently announced that it would refine its 21-day hold policy on PayPal accounts for eBay sellers, which allows PayPal to freeze funds in merchant accounts. It now says it moves held money into a non-interest bearing account.

We’ll know more about PayPal’s small business plans at its San Francisco event on Thursday, which is likely to touch on other areas as well. But the early signs suggest the mobile payment space is about to get even more competitive.

  1. Brian Roemmele Monday, March 12, 2012

    This is going to have a huge impact on every player in this sector. PayPal has far deeper reach into small businesses that also align to Square’s current core users than any other company.

    PayPal will lower the costs per transaction to a cost that Square can not reach. I am predicting a flat fee of 1.99% with $0 transaction fees for cards that are swiped. PayPal can reach a far lower overall price point for a number reasons. There are also other things that PayPal will bring to the product that may make it harder for Square. Some may call part of PayPal’s strategy, “Priceless”.

    But don’t count Square out. They have a dream team of management and technologists that have produced astounding results thus far. However Square will need more than a great price and incredibly great user experiences to cement the amazing lead they have. There are a number of very non obvious ways that Square could mitigate the impact PayPal will have on the market. I can see about a dozen product extensions that would make PayPal’s lower cost become less of an issue. I firmly believe Square has the momentum but a very intimate understanding of actual use cases of the Square and the Square register is in order, this will require reaching out to experts that have intimate knowledge of the industry. This usually is the last thing a great startup wants to be seen doing. I think Square will rise to the occasion.

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    1. Thanks for the comment Brian. PayPal has been late in getting to this point but it’s starting to put things together. You can’t count Square out though. They’re really nailing it right now and I like where they’re going with Card Case. This is going to be interesting to watch.

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      1. They may be nailing it right now, but not in the UK. I really hope they launch here soon. Paypal could get a jump by entering markets that Square is not in yet.

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  2. Paypal can drop dead and go bankrupt before I would ever use these crooks again.

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    1. I think alot of people would agree with you. Just do a google search and read the horror stories. Part of that is because of how long they have been around. I still use PayPal, and luckily have had no trouble.

      Good article though. Will PayPal be giving the dongles out free? That was one of the really nice things about square.

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    2. I agree. If you have ever tried to build Web properties using Paypal on the back end the horror stories are universal and never ending. We used it for a social auction site and it was by far the most maddening and difficult process you could imagine with zero support from Paypal. I would warn off EVERYONE remotely interested in a mobile ecosystem to dev with anyone OTHER than Paypal. You will be glad you did!

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  3. It’s neat to see more players enter into the space.

    It seems like Square’s biggest risk was that new players would enter into the market — and it’s happening. It will be interesting to watch a focused company compete with a larger one with bigger distribution channels.

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  4. I use Square for my restaurant. I’ve used PayPal for many things online. Square has nothing to worry about IMO. If anything, PayPal has something to worry about.

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  5. Antanas Valiulis Tuesday, March 13, 2012

    Too big to fail? Not in Paypal case. Wait to see they are gone. They still hold my 6000 $ for year now. Will see what California FDI can do about it.

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  6. I sold a significant part of my baseball glove collection though Ebay over the course of 4 months and was paid thru Paypal, no problemas. That was about $7000 in transactions and 90 different buyers, no snafus.

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  7. Mariam Bahoura Tuesday, March 13, 2012

    I use PayAnywhere’s app and i’ve never had a problem with them. They have low rates and the features are easy to use. I considered Square before, but i really like PayAnywhere’s service. It’s perfect for small business owners. Here’s a link to their site: http://www.payanywhere.com/home

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  8. Philip Charles Cohen Tuesday, March 13, 2012

    Square has nothing to worry about, PreyPal could not hit the side of a B&M barn. Next time you drop into Home Depot, ask the check-out chick if anyone has yet used the wholly eBay-funded roll out of PreyPal to make a POS purchase. PreyPal at B&M is little more than an eBay Dept of Spin-created illusion and is undoubtedly a total waste of eBay shareholders’ funds …

    And, just for a laugh, a critique of “The New Way To Pay In-Store” via eBay’s clunky PreyPal.

    http://forums.auctionbytes.com/vbulletin/showthread.php?t=24611

    eBay / PayPal / Donahoe: Dead Men Walking

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  9. As a consumer I won’t use PayPal anymore,I simply don’t trust them. As a merchant look closely, they are not Visa or MC.

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  10. I really doubt that Paypal would offer a 1.99% $0 trans fee option as they would lose money at that price and run the risk of alienating their existing user base. Paypal can offer low rates for web users because they take money from the user wallet first, ACh second and only credit cards as a last resort so their actual costs are much lower. I don’t see how they do that at retail unless they try to link the credit card back to a Paypal account and then use it to take funds from the wallet which defeats the point.

    I can see Paypal trying to use their phone number and pin technology on a mobile payment device and merge that together with a swiper but the rates for card swipe only would have to be higher.

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