Multiple questions remain a week after Square Inc. announced its mobile phone-based payment system that it says could enable merchants to process card transactions without a traditional merchant account.

Many observers want to know if Square will be able to work around card-brand rules requiring merchants to have separate accounts to process transactions.
The company has been attracting attention in the blogosphere since May, when word first emerged that Jack Dorsey, founder of the popular Twitter Inc. micro-blogging service, was exploring a mobile-payment technology.

Dorsey gave interviews to the TechCrunch blog and the Los Angeles Times.
TechCrunch described the introduction of the payment system as an ongoing "private beta."

Square did not respond to repeated interview requests from ISO&Agent Weekly and sister publication American Banker, though Dorsey said the company had no rate information at this time. Both are sister publications of ATM&Debit News.
The Square system uses a cube-shaped card reader that attaches to the audio jack of Apple Inc.'s iPhone.

One way Square could work around the merchant-account requirement is if it becomes an aggregators of transactions, much like PayPal, says David Fish, senior analyst at Mercator Advisory Group Inc., a Maynard, Mass.-based consulting firm.

Payment aggregators use their merchant accounts to facilitate transactions for sellers who do not have their own accounts. "I would imagine that Square is the user-facing entity, but they are merely aggregating the transactions under their own merchant account for submission to their own acquirer," Fish says.

If Square is an aggregator, it may have difficulty working around the card brands' merchant-account rules, suggests Todd Ablowitz, president of Double Diamond Group, a Centennial, Colo.-based consulting firm. "It's a lot harder than it looks," Ablowitz says. 

Square also likely is telling its investors that the start-up is going after merchant segments that are not accepting payment cards already, Ablowitz suspects.
"A merchant is not going to switch to a mini-jack powered device from a point-of-sale terminal," he says.

Square's lack of response with many industry analysts and media outlets is telling, contends Aaron McPherson, a research manager for payments at IDC Financial Insights, a Framingham, Mass.-based research firm.

 "I wouldn't go so far as to say there's some deep, dark secret they're hiding," but "I think it means they're a long ways off from having a real product" and are more interested in generating early buzz, he says.

McPherson also has reached out to Square but has not heard back.

If Square can enable merchants and consumers to accept card payments without a conventional merchant account, that may be a bigger selling point for the system than the technology itself, says Beth Robertson, director of payments research for Javelin Strategy and Research of Pleasanton, Calif.

"There are some solutions that are similar that are available from merchant acquirers," she says. "The difference here is it appears that one does not have to go through the normal qualifications that a merchant acquirer requires for a merchant to accept cards."
Robertson is not aware of any vendor today that is able to sidestep the normal requirements for card acceptance.
The Web site also promises that the Square device could be used to process payments without having a merchant contract, a claim with which McPherson takes issue.
"Without any contract, how do you know that the money is going into your bank account?" McPherson asks.
Further, using such a system without a firm relationship with the vendor is likely against the card brands' bylaws, he says. "MasterCard and Visa won't let you do it."
MasterCard Worldwide's rules state that merchants processing MasterCard transactions must have a "direct relationship with an acquirer," according to a company spokesperson.
 "That being said, we continue to evaluate innovative acceptance technology, like Square, that supports MasterCard acceptance," especially among merchants where cash and check predominate, says the spokesperson.
Visa Inc. is aware of Square but does not have enough information to comment about it at this time, according to a company spokesperson.

Information Lacking
Though the company appears to have designed the product for merchants, Square's initial marketing push has focused primarily on how consumers can use it, sometimes even casting its device as a person-to-person payment system. Merchants, however, get little information from the articles or Square's Web site on how the device is set up or what it costs.
As such, observers have come to see the system as more flash than substance.
They say Square ignores pertinent business details. such as whether the device adheres to the Payment Card Industry Data Security Standard, to instead talk up Dorsey's success and the allure of the iPhone.
"The play here that's interesting is: 'We have an app for that,'" says Brian Riley, research director in the bankcards practice at TowerGroup Inc., a Needham, Mass.-based research firm. "But in the same token: Do you have a PCI-compliant app for that?"
The PCI standard, which governs how companies must protect any payment data they handle, is no trivial concern, he says.
The card brands can penalize companies that cannot show that the technology they use meets the guidelines.
Riley attempted to sign up online with Square as a merchant, but all the Web site allowed him to do was join a mailing list.
Providers of competing technology make it easier for merchants to sign up directly from their Web sites, he says.

Industry Speculation
Though Dorsey has said in interviews that the device itself may be given away for free, the pricing of the service is unclear.

"I'd expect that that would be higher than the lowest rate on a merchant account," says McPherson. "They really can't charge less than standard interchange" and still expect to make money.

Moreover, merchants that need to take payments on the go already have multiple options.

Riley suggests First Data Corp.'s FD50 handheld card reader, and McPherson suggests ProPay Inc.'s MicroSecure reader. Robertson suggests Merchant Warehouse Inc., which sells wireless terminals and a virtual terminal that can run on an iPhone or Research In Motion Ltd.'s BlackBerry.

Companies as diverse as the card processor Total System Services Inc. and Intuit Inc., the maker of the small-business accounting package QuickBooks, also are offering mobile card-acceptance systems.

According to an online video demonstration of Square posted by the TechCrunch blog, a merchant taking payments on an iPhone would swipe a card on the square device, then ask the consumer to sign on the iPhone's screen with a fingertip.
The consumer also can type in an e-mail address to receive an electronic receipt of the transaction.

The system is also a person-to-person play. Dorsey told the Los Angeles Times' "Technology" blog that consumers could use the device to split a dinner check among friends.

Besides the dubious utility of the dinner-check example, little business reason exists for Square to explore that space, McPherson says. "I don't really understand why everyone's so obsessed with this P2P thing," he says. "There's no money in it," in contrast to the business-to-consumer space, which he says "is much more promising."

Even Twitter, the highlight of Dorsey's resume, has followed this path, McPherson says.

"Twitter is much more of a business-to-business thing at this point, or business-to-consumer," he says. "If you look at the top Twitter tweeters, they're all media publications or analysts."

The confusion around Square's function, pricing and market are an effect of its marketing effort, McPherson suggests.
He believes the company hopes to tantalize its audience with an air of mystery, and though this strategy may work for consumer electronics, it will fall flat with merchants, he says.
"The revenue for this is going to come from merchants, and businesses are not going to want a 'mysterious' product," he says. ATM

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