LearnAt The Crossroads of Technology and Business: Mobile Payments


writes on September 20, 2012

I was at the local farmer’s market this past weekend, doing my usual shopping rounds and as I came up to the counter raggedy desk to pay, I realized I didn’t have any cash with me. I quickly apologized to the seller, and the line behind me, and made a dash for the nearest ATM to withdraw some money. Before I could take more than a few steps however, the seller told me not to worry, he could take cards now, and proceeded to fish out something I least expected to see at a farmer’s market – the Square reader.

Square Reader – Photo courtesy of Emily Chang

This is revolutionary. For a small business owner like a farmer, the ability to take card payments has huge potential. It offers convenience and access to a larger customer base, and thereby a larger revenue stream. Mobile payments, and by this I mean services that allow you to receive payments on your phone using a physical reader or app, in contrast to paying with your phone using NFC technology, is blowing up as an industry. But to understand why services like Square are hugely successful, let’s take a look at how businesses traditionally accept card payments.

In the world of accepting payments, there are three hurdles you have to clear – setting up a merchant account, obtaining processing equipment, and navigating the fee structures.

Setting up a merchant account

To be able to accept credit cards in your store, you can’t simply swipe a card and expect the money to go straight from your customer’s card and into your bank. To accomplish this task, you will need to implement the services offered by a merchant account. When you swipe a customer’s credit card, the details are sent to the merchant account, which routes the payment authorization request to the customer’s bank. The customer’s bank either approves or declines the transaction and sends the results of the request back to the merchant account. This happens in a matter of seconds; we experience this on a daily basis when we swipe our cards – it takes a few seconds for the receipt to pop out or for the store clerk to awkwardly tell us that our card didn’t work. After that the merchant account routes the payment to the business owner’s bank – this process is called settlement and may take a few business days.

You apply for a merchant account much like you would a regular bank account – sometimes your bank may even offer merchant accounts. Most often though, you will have to go through a separate merchant service provider. Unlike a bank account, for a merchant account you will have to provide a lot more information and it will take a lot longer to get approved – sometimes up to three months. This is because since you will be taking money from other people, the merchant account provider has to check up on you. Finally, merchant accounts may not allow you to process all types of cards – sometimes you might need to do some additional work before you can accept American Express and Discover cards.

Getting the equipment

Once you have the merchant account set up you need to either lease or purchase the necessary equipment to facilitate the payment capture. This includes a credit card terminal, pin pad, a receipt printer and receipt paper and ink from time to time. The card terminal will be attached to a modem so that you can send and receive transaction verification immediately.

Understanding Fees

Finally you have to understand the fee structure associated with processing credit card payments. Most companies charge a fee per transaction that is a percentage of the total amount. In addition to that, sometimes you can get charged a per transaction fee of around 20 − 50 cents. On top of all that, you could even get charged a monthly, quarterly or annual fee for the service.

That’s a rough idea of the payment process when someone pays you in person. It gets even more complicated if you want to accept online payments. I’m not going to go into that here, but if you want to dive deeper into that topic you can watch my lesson over in the Business section of our content.

Treehouse Business Lessons – Collecting Money Online

Can you see how all this gets pretty cumbersome and expensive, especially for smaller businesses? One of my extended family members runs a tire store in Florida. His customers’ bills run an average of a couple hundred dollars and they all pay by card. All this amounts to monthly transaction fees of $2500 for accepting credit card payments. That’s crazy.

Enter mobile payments

Using a service like Square removes all those hassles for customers. Now there are many companies and devices out there, like PayPal’s Here and Intuit’s GoPayment but I’m going to spend some time on Square in this article because it best highlights how mobile payments are a huge advantage to small business owners.

So with the traditional route, we have three steps:

  • Set up a merchant account
  • Get all the equipment
  • Shop around for best rates and fees among different providers and understand your fee structure.

Square almost eliminates all three steps. All you have to do is sign up on their website. Really.

First off, by using Square, you don’t need a merchant account. That’s right, due diligence, application, waiting period – you can forget about all that. With Square, once you have the reader, you can start accepting payments immediately. All you have to do is link your bank account, and that’s as simple as entering your name, routing number and account number.

Next, you don’t need any equipment! Once you sign up, Square sends you a card reader for free. Mind you, you do need a smart phone or a tablet and both iOS or Android devices will do. But some standard credit card terminals are around the same price as an iPad, so it’s not that big of a difference.

Unlike standard merchant accounts, Square processes your everyday Visa and Mastercard as well as American Express and Discover Card for no extra cost.

Square’s simple pricing option

Lastly, and best of all, Square has easy to understand, transparent pricing models. Your first option is a 2.75% per swipe and no monthly fee. If you manually enter the transaction its 3.5% plus a 15 cent fee. That’s it.

Compare this to Merchant Warehouse that requires a monthly minimum transaction of $25.00, charges a monthly gateway fee of $5.00, a monthly statement fee of $7.95, a rate of 2.19% + $0.21 per transaction if the card is not present, 1.69% + $0.21 if the card is present, and a $0.05 address verification fee. Talk about complicated!

Monthly Pricing from Square

The second option is even better. In their own words:

With one monthly price, we’ve revolutionized credit card payments for small business. Again. Pay just $275 per month. Get 0% credit card processing.

The caveat is that if your transactions go over $250,000 annually you’re bumped back up to the next pricing model – which still works in your favor. For businesses that process an average of $20,800 ($250,000/12) in credit card payments a month, you can pay a single price of $275. If you were to pay a percentage price, for $20,800 a month in payments, you’d get charged $572 ($20,800 * 2.75%).


Services like this have the ability to disrupt entire industries. And it’s already happening.

If you own a small business and you either don’t accept credit card payments because it’s too expensive, or you already run a business with high credit card transaction costs, do yourself a favor and try these services out. Plus, an iPad as your cash register looks much nicer anyway!


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