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Square Inc., the mobile-payment startup founded by Jack Dorsey, is giving smaller merchants more flexibility in how they pay for credit-card transactions, increasing competition with PayPal's rival card reader.
Businesses with less than $250,000 in revenue a year will have the choice to forgo the standard rate of 2.75 percent per credit-card swipe and instead pay $275 a month with no fees, Dorsey said. Square lets retailers accept payments through a device that plugs into a phone or tablet.
Dorsey is aiming to give customers a reason to choose Square over PayPal Here, a mobile card reader from the eBay Inc. unit that also plugs into the headphone jack of a smartphone yet charges less, 2.7 percent per transaction. The companies give away the devices, which both accept the four major types of credit cards, and generate revenue by collecting swipe fees.
"Sixty-two years ago was the first time a merchant was charged a percentage on a transaction," said Dorsey, CEO of Square and a co-founder of Twitter Inc. "The industry really hasn't reconsidered the pricing."
Square is processing $6 billion in transactions on an annualized basis. PayPal expects mobile-payment volume to reach $10 billion in 2012. PayPal hasn't said whether its product that competes with Square, which was released in March, will contribute to the total volume of mobile transactions.
Square's flat monthly rate will give sellers another way to predict costs and budget accordingly, Dorsey said.
Merchants usually "can't predict what they're going to pay to accept these payments," he said. "If you put a normal credit card down, they may pay a really low rate. If you put a card down with rewards, it might go up to as much as 5 percent. What that means for a small business is they don't understand how much money they can use to spend on inventory."
The $275 monthly rate is equivalent to a 1.3 percent fee for the first $250,000 a business reaches in revenue, Square said.
The checkout-anywhere devices are helping Square and PayPal stand out in the market for mobile payments, which may top $170 billion in transactions by 2015, up from $60 billion last year, according to Juniper Research. Both gadgets accept cards from Visa Inc., MasterCard Inc., Discover Financial Services and American Express Co.