Square's EMV Model Is a Low Hurdle, But Merchants May Still Balk

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Square Inc. may have more incentive than other acquirers in urging merchant clients to accept EMV-chip cards, but its pricing strategy could deter some from adopting the secure technology.

Square has long targeted micromerchants with a free plug-and-play mobile card reader designed to enable card acceptance with minimal technology expertise. And since smaller merchants are also considered the least prepared for the adoption of EMV cards, an EMV version of Square's reader should go a long way to improving payment security overall.

But the absence of a free option for the EMV variant of Square's mobile card reader could be problematic. Though Square's new devices, priced at $29 and $39, should be affordable to most merchants, the fact that Square is attaching a price tag at all introduces a hurdle that could slow the adoption of the secure technology.

"Up until now, Square really had a zero acquisition cost," said Gil Luria, analyst with Los Angeles-based Wedbush Securities. "A customer would just say they wanted Square and wouldn't have to pay for anything."

Square provides the current version of its mobile card reader free and charges no other monthly costs, other than fees on transactions, Luria said. Square Stand has always had a price tag, but it is meant for merchants with more complex needs, such as a connection to a cash drawer and receipt printer. Though some retailers charge $10 for Square's entry-level reader, Square quickly credits the amount to the merchant.

But the portable EMV-card reader, which looks nearly identical to Square's current reader, "changes all of that because now you are charging customers to come to Square," Luria added.

EMV improves security over magnetic-stripe cards. The U.S. card networks set an October 2015 deadline for most companies to handle EMV payments, after which a company that has not migrated to EMV faces a shift in fraud liability. Companies can choose to ignore this deadline and deal with the added liability.

Square plans to continue to offer its free reader to merchants who do not care to pay for EMV security, but this creates problems for Square, since it is the merchant of record for all transactions. This means the card brands would view Square as the company liable for fraud on EMV cards used with its magstripe reader, Luria said.

From Square's perspective, if a seller uses the magstripe-only reader to process chip cards, then "the seller will be financially liable" for fraudulent charges on those transactions after the October 2015 timeline, said Square spokesperson Catherine Ferdon via e-mail. Ferdon did not provide further details about this policy.

It is possible that Square addresses the liability issue in its agreements with merchants, but generally "any provider that aggregates transactions on behalf of merchants" would be liable as the merchant of record, said Richard Crone, chief executive of San Carlos, Calif.-based payments consulting firm Crone Consulting LLC.

"They all face that challenge, whether it is Square, Google Wallet or PayPal," Crone said.

It has been part of Square's business model to aggregate transactions, bundle the price and build in protections for potential liability, Crone said.

Square has been in the Canadian EMV market with a non-EMV reader for the past few years. Ferdon said the company is concentrating on the U.S. EMV migration currently, but has plans in the works for a chip-and-PIN reader for Canadian merchants in the future.

With the liability shift now less than a year away in the U.S., Square is "working hard with both bank and card network partners to make the EMV migration as easy to understand and implement as possible for our merchants," Ferdon added.

Square first alerted its customers in July that the EMV chip-and-signature reader would be available for presale before delivery in January 2015.

The development of EMV card readers positions Square to compete in other global markets, Luria notes.

"They now have a product globally that would be compliant with EMV regulations, but they are not an early entrant into that market," Luria said. "There are many companies that have EMV in many European markets."

PayPal, a unit of eBay Inc. of San Jose, offers a magstripe version of its PayPal Here card reader in the U.S. and an EMV version in other regions.

IZettle has long had an EMV mobile card reader, targeting mostly the Nordic regions of Europe.

In April, U.K.-based Powa launched a mobile POS terminal it calls PowaPOS with an accompanying EMV chip-and-PIN reader that it plans to make available in the U.S.

First Data and Roam, a unit of terminal manufacturer Ingenico, developed EMV mobile card readers for India, using technology it could duplicate in various other markets.

Verifone has pushed its Payware mobile reader for use in various forms of mobile POS offerings. In May, the terminal manufacturer partnered with iPayment to deliver tablet-based systems with the attached reader. 

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