iZettle, Europe’s rival to Square, hits the UK

Swedish payments startup iZettle is making its most significant since coming out of beta last year, with a pilot program to enter the potentially huge British market.

izettle promoUntil now the company, billed as Europe’s equivalent to Square, has so far only made its product — a free plug-in dongle and app that let small merchants accept card payments through their iPhone or iPad (s AAPL) — available in Sweden, Norway, Denmark and Finland.

But as of Wednesday, it is offering 3,000 mini card readers to merchants in Britain, as part of a limited rollout in the United Kingdom.

“The U.K. is pretty special in Europe,” iZettle CEO Jacob de Geer told me ahead of the announcement. “We’re expecting the same kind of interest we’ve seen elsewhere… [but] it’s crucial for us to understand the difference in behavior between Britain and other parts of Europe.”

Anyone who wants to be part of the pilot can apply at iZettle’s U.K. website, although not everyone will necessarily be approved, because the company is trying ensure a spread of business types and locations.

IZettle has already gathered some 50,000 merchants across the Nordic region, but this will be its biggest test yet: by de Geer’s reckoning the market could be three or four times larger — perhaps even more.

“It’s just the fact that there are 60 million people in the U.K., while across the entire Nordics there are 20 million. If you break it down, there are 1.2 million point of sale devices already in the U.K., whereas in the Nordics there are 300,000. All the numbers are drastically higher.”

It’s the latest step forward from the Stockholm-based service, which has raised more than $16 million in funding from Creandum and Index, and has gathered more than 50,000 merchants since coming out of beta last November. Recently it dropped the fixed cost element of its pricing structure, and now relies purely on taking 2.75 percent of each sale — a move which simplifies costs and brings it into line with Square.

But although the hot San Francisco company has clearly paved the way for iZettle, there are some important differences between the two businesses. Unlike Square’s reader or PayPal’s equivalent (s EBAY), which both rely on using the magnetic strip on credit cards, iZettle can read cards with embedded chips — a higher security standard that is the norm in Europe and much of the rest of the world. This requires a much higher technical and regulatory burden.

Then, of course, there’s the issue of availability: Square has shown little interest in expanding outside the US, and even now PayPal is in the game, it has not dealt with the technological issues that it would need to broach to enter Europe.

There is one significant unknown, however: iZettle uses chip and signature, rather than the chip-and-PIN that is dominant in Britain. That doesn’t stop the service from working (signature is still a valid way of authorizing payments) but given that shoppers have been inculcated with the idea that punching numbers is more secure than signing, de Geer admits that it will be something of an experiment.

“That’s probably one of the most interesting things we’re expecting to see,” he says. “But our fraud rates in other markets are well below the industry average, partly because we’re approaching carpenters, plumbers, blacksmiths — and generally when you want to pay your plumber, if you’re happy with their work, you don’t hand over a stolen card… it’s a face-to-face transaction.”

If all goes well, the service could be rolled out on a wider basis in a few months, with more card types accepted (the pilot only covers MasterCard, Amex and Diner’s) and the possibility that of a distribution deal to get the device sold in a major high street chain. The company already has a similar deal in place with Swedish telco Telia, and counts Charles Dunstone — the founder of leading British retailer Carphone Warehouse — among its backers.

High street distribution would “not too far-fetched” said de Geer.