Card reader

What price for Square's cool features?

May 24, 2011: 1:59 PM ET

Jack Dorsey is trying to make it hip to use Square's new Register and Tabs features, and he's taking a page from Apple on premium pricing.

FORTUNE -- Jack Dorsey's startup, Square, gets a lot of attention from the media. After all, Dorsey is also the co-founder of Twitter, which means plenty of people in Silicon Valley want to know about his every move. But Square's high-profile status doesn't mean its plans to become the new payments platform of choice is a sure bet.

On Monday the San Francisco-based startup unveiled two new products: A digital cash register for merchants and a digital wallet for customers. Register is an iPad app that allows merchants to accept payments (via a credit card reader or cash), generate digital receipts and update menu items and pricing from a virtual storefront. Card Case, the consumer version of Square's new application, lets customers open a tab at coffee shops, bakeries and other local businesses and charge items to their account just by giving their name.

The announcement isn't nearly as exciting as the rumors that were swirling last week -- that Square would partner with Apple or integrate Near Field Communications technology (neither of these has happened -- yet). But Register and Card Case are stepping-stones to Square's master plan: Become the payments platform of choice for local businesses.

"In order to do this right you have to have one system," Dorsey said at Monday morning's press event. "You have to build for the whole -- buyer and seller and everything in between."

Dorsey launched Square about two years ago. It got off to a bumpy start (including delays and a patent dispute) but has since managed to attract about half a million merchants who use its tiny credit card reader to process payments. According to the company, it is now processing $3 million in mobile payments each day. Those are impressive numbers, but while Square simplifies credit card payments by taking a standard 2.75% cut of each transaction, that fee is on the high end compared to transaction fees other companies charge to merchants who take credit cards -- which hover from about 1% to 3% (though traditional banks typically also charge an added flat rate per swipe and monthly fees).

If Square is managing to save itself any money by batching transactions or somehow more slicing the Gordian knot of interchange fees, swipe fees, no card present fees, etc., it's not yet letting that information on to customers or the public, nor passing those savings on to its merchants. The high cut may be the premium CEO Dorsey believes hip cafés and artists who want to accept credit cards are willing to pay for novelty and convenience of using Square. In that, Dorsey appears to be taking a page from Steve Jobs at Apple (AAPL), who has long priced his company's products at a premium to the competition -- believing customers who are willing to pay more for an Apple's ease of use and quality are the types of customers he'd rather have anyway.

Then again, Dorsey's long-term vision may not have much to do with its signature square-shaped readers or credit cards. Square is already offering analytics tools to customers, and Dorsey has said that some merchants are also using Square as accounting software for cash-only transactions.

For now, though, offering small businesses an easier way to accept credit cards is a focal point for Square. And even when "simplified," credit card processing is still a costly and risky business.

Square's new features are impressive. Register may help some merchants get rid of their traditional, clunky cash registers and credit card terminals, and the new "tabs" feature is supposed to add another layer of security (it requires users to upload a photo of themselves and enter a PIN for transactions above $50). But for all their capabilities and sleek user interfaces, the new apps -- and the love Square gets from the media -- won't reduce the 2.75% fees merchants pay for each transaction. It will, however, increase the pressure on Dorsey and Co. to continue innovating around -- and beyond -- their little plastic headphone-jack credit card reader.

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