The iPhone as a Cash Register

Card readers that plug into smartphones, made by Square and others, are bringing new sales to small merchants

Last year, Mark Pastore wanted to expand his cured meats business, Boccalone, beyond the exposed-brick confines of its store in San Francisco's Ferry Building. When he began trucking salamis and sausages to farmers markets around the Bay Area on weekends, accepting credit cards was a hassle that involved entering customers' numbers manually into his cell phone. So last October he started using Square, a matchbook-size credit-card reader that plugs into his iPhone and automates the entire process. "It's like a virtual cash register," says Pastore, noting that the outdoor operation helped put his four-year-old business over $1 million in sales last year and may account for 10 percent of revenue in 2011.

Pastore is one of thousands of entrepreneurs using cheap, simple payment devices made by Square and at least two other companies. Smartphone card readers are being used by an Austin (Tex.) veterinarian making house calls, a sidewalk artist selling books in New York's Washington Square Park, and heating and cooling technicians in rural Ohio, who accept swipes for thousands of dollars of repairs with no paperwork.

Payments made via smartphone credit-card readers—a technology that didn't exist a few years ago—will total $11 billion this year, researcher Aite Group estimates. By 2015 such transactions could amount to $55 billion, it says. "When smartphones came on the market, it became clear that there was going to be an opportunity to connect remote salespeople with sales opportunities," says David Robertson, publisher of The Nilson Report, an industry publication.

Square, a Silicon Valley startup launched by Twitter co-founder Jack Dorsey in 2009, has helped fuel interest in mobile payments. It and similar products from Intuit (INTU) and Verifone (PAY) are giving entrepreneurs a range of options for turning phones into payment kiosks. For Intuit, what began as a technology aimed at tradespeople "has turned into much more of a mass market product," says Chris Hylen, general manager of the company's payments division. "It solves needs for small businesses anywhere."

Most of the products give merchants a free or inexpensive app and a card reader that plugs into a handset. Customers swipe a card and sign the touchscreen with a finger or a stylus, then get an e-mail or a text with a receipt. The services cost merchants 15¢ to 20¢ per transaction plus 2 percent to 3 percent of the sales amount and, sometimes, a small monthly fee. After the payment is processed, money is deposited in the merchant's bank account.

Intuit offers its free GoPayment card swiper to the 4 million small businesses that already use its accounting software, QuickBooks. Square, which says it's adding some 60,000 merchants a month, sends boxes of its card readers to users who agree to talk up the service. Chief Executive Officer Dorsey expects this effort to encourage Square's adoption among food trucks, taxi drivers, and other entrepreneurs who, he says, "would benefit massively from Square."

Swiping a credit card on an iPhone is bound to turn off some mobile merchants, says Nick Holland, an analyst with technology researcher Yankee Group. "When you have somebody whose core business is delivering pizza and they need a robust design, these aren't going to do the job," he says. Unlike devices dedicated to reading credit cards, smartphones can be used to download malicious software that could allow hackers to mine them for information, warns financial services researcher Javelin Strategy & Research. Companies that sell smartphone card readers say the risks are minimized by encryption software and other technologies ensuring that cardholder information is never stored on the phone. "We are maniacally focused on security," says Robbie Lopez, head of global payment software at VeriFone.

Some merchants are using the mobile options in their stores. After a power surge fried the card-processing terminal at Remedy Coffee in Oakland, Calif., owner Todd Spitzer discovered that a new one would cost $7,000. So he opted for Square's free card reader, which he plugs into his iPad. Square charges him 15¢ per swipe and 2.75 percent of each transaction, vs. the 20¢ plus 3.5 percent and $10 a month he was paying before. He's now using a second Square in an Airstream trailer he converted into a coffee truck that he parks outside the Berkeley Art Museum and other area attractions, and he'll have a third in a shop he's opening soon inside the museum. Spitzer hopes to triple Remedy's revenues this year, to about $1.3 million.

Many small business owners say accepting cards gives them greater credibility. "I want to make sure we look like we are a legitimate business and not some vendor that's just going to be there for the moment," says Doug Ipock, owner of Fusion Sports, which sells athletic apparel from a truck at amateur lacrosse, soccer, and other sports tournaments in North Carolina. Since Ipock began accepting credit cards using Intuit's GoPayment service in addition to cash, he says more coaches and school athletic directors have made repeat orders by phone or via his website.

At least for now, merchants say, they also benefit from the cool factor. At 2 a.m., after last call in Portland, Ore., bar patrons in the hip Old Town neighborhood line up at Big-Ass Sandwiches, a food truck. Lately, customers have been as intrigued by the Square device used to swipe their credit cards as by the eclectic menu. Some even make return visits just to show friends, says Lisa Wood, who runs the truck with her husband, Brian. "It becomes this whole spectacle."

The bottom line: Card readers that plug into smartphones let even the smallest businesses accept credit cards, at a cost of about 3 percent of sales.

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