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Mobile payment company Square was founded in 2009 by Twitter creator Jack Dorsey and computer science engineer Jim McKelvey, and has evolved rapidly over the past four years. The company, which counts Starbucks Corporation (NASDAQ:SBUX) CEO Howard Schultz and Yahoo! Inc. (NASDAQ:YHOO) CEO Marissa Mayer among its investors, has grown rapidly from a mobile payment app into a budding e-commerce site, which now aspires to challenge industry behemoths, Inc. (NASDAQ:AMZN) and eBay Inc (NASDAQ:EBAY)., Inc. (NASDAQ:AMZN)

If Square eventually goes public, as some analysts speculate, the influx of cash could make it a force to be reckoned with in e-commerce. How did this company rise to prominence in the three short years since its first app was launched, and how will its industry peers respond?

Hip to be square

Square’s first product, Square Register, allows individuals and merchants to accept debit and credit card payments on their Apple Inc. (NASDAQ:AAPL) iOS and Google Inc (NASDAQ:GOOG) Android mobile devices via the Square Reader – a small card-reading dongle that can be plugged into the audio jack. In response, eBay Inc (NASDAQ:EBAY)’s PayPal launched a similar product, PayPal Here, in March. Square charges 2.75% per transaction, while PayPal charges 2.7%. However, Square offers a flat rate of $275 per month for heavy users, which could generate substantial savings for small businesses. Square claims that its service has over 3 million users.

Square’s second product, Square Wallet, is an online wallet that allows customers to pay by simply checking into a location. The app links a user’s credit card information, loyalty cards and available gift cards together, allowing users to simply pay by saying their name. PayPal also recently introduced a similar service, in which users can pay from their smartphones at participating restaurants.

PayPal goes a step further than Square by adding location-based social features to its app, similar to Yelp and Foursquare, which allow users to find nearby businesses. Several Starbucks and Jamba Juice locations have used PayPal’s app to store customer photos, ordering histories and special dietary needs.

Both Square and PayPal are convinced that Americans will eventually abandon their physical wallets in favor of a digital one on their smartphones. According to PayPal, a recent study indicated that 80% of surveyed Americans wanted to leave their wallets, and their collection of loyalty cards, at home.

A square Apple

PayPal has been particularly aggressive in expanding its brick-and-mortar footprint. Since introducing in-store checkout in December 2011, the service has been adopted by 250,000 stores, including major retailers such as Barnes & Noble, Radio Shack, Home Depot and Toys R Us. The company has a stated goal of expanding this service, which integrates into existing POS (point of sale) systems, to 2 million stores by the end of the year.

Not to be outdone by PayPal, Square recently launched the Square Stand, a $299 device which instantly transforms any iPad 2 or iPad 3 into a POS register capable of accepting debit and credit card payments. The total cost of an iPad and the Square Stand is around $800, far less than the thousands it costs to set up a traditional POS system. In addition, many Americans already own previous generation iPads, considering that Apple Inc. (NASDAQ:AAPL) sells nearly 20 million iPads every quarter. Connecting the device to an iPad running Square’s POS management apps also allows businesses to track sales data, control inventories and manage employees.

Square also offers the more complex “Business in a Box” bundle for $299, which operates on the same concept as the Stand (an iPad as a cash register), but includes a cash drawer. An additional printer for paper receipts can be purchased for $300.

Associating itself with Apple Inc. (NASDAQ:AAPL) was a brilliant move by Square, which used the combined aesthetic appeal of the Square Stand and the iPad to distance itself from traditional POS systems, which are far from elegant. However, Square’s footprint is still tiny compared to PayPal’s retail partnerships. Square currently has 13 businesses signed up to use Square Stand at 30 locations nationwide.

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