State of the Art: As Pay-by-Phone Advances, Square Takes Another Leap — State of the Art

And if those squealing rugrats don’t believe us, we can crack open the history book to 2012, the dawn of the twilight of cash and credit cards. That was the year when, for the first time, paying for things in stores required nothing more than saying your name to the cashier.

But first, some history. In 2010, a company called Square invented a credit card reader in the shape of a tiny white plastic square. It pops into the headphone jack of your iPhone, Android phone or tablet. Together with a beautiful, simple app, it lets you swipe people’s credit cards (meaning scan them, not steal them).

Suddenly anyone can accept cards: baby sitters, cabdrivers, farmer’s market vendors, piano teachers, personal trainers, bake salers, carpenters and lawn-mowing teenagers.

Square takes 2.75 percent of each transaction. Unlike traditional credit card arrangements, there are no monthly fees or minimums, setup costs or variable percentages. There aren’t even equipment costs; the headphone-jack reader is free. There truly are no other costs or catches. (My column online has a link to my full review.)

The Square went viral. Today, the company says that two million Americans are happily swiping away.

Where there’s a hit, there’s a copycat, or a whole litter of them. It’s the same idea each time — you get a free plastic attachment for your phone’s headphone jack — with differences only in rates and target markets.

Intuit offers something called GoPayment, with a rather huge phone attachment and a complicated rate structure. (It advertises a 2.7 percent rate, but the fine print reveals that you’ll pay 3.7 percent for reward cards, American Express and corporate cards.)

A company called mPowa is aimed at big companies that want the money to flow directly into their own accounts — not be deposited first into a holding account, as Square, Intuit and others do. PayAnywhere’s notable feature is that it takes the lowest cut of all: 2.69 percent.

And then there’s the elephant that’s just barged into the room: PayPal. Its rate is a hair lower than Square’s (2.7 percent), and its reader is a triangle instead of a square. The reader is more stable than the Square when you swipe the card, but it’s relatively giant. (I’ll review some of these services in more depth on my blog, Pogue’s Posts.)

All right, we get it: The little-guy-accepting-cards racket is heating up. But to Square, that’s all been just a warm-up act. The main event is even more disruptive. It’s a little something — a big something — called Pay With Square.

You walk into a shop or cafe. The cashier knows that you’re on the premises, because your name and thumbnail photo appear on his iPad screen. He rings up your items by tapping them on the iPad.

And now the magic moment: To pay, you just say your name. The cashier compares your actual face with the photo on the iPad’s screen, taps O.K., and the transaction is complete. No cash, no cards, no signatures — you don’t even have to take the phone out of your pocket.

It’s glorious for you, because it’s so much faster and less fussy than the old ways of paying. It’s fantastic for the merchant, because lower friction (hassle) means more sales. The merchant’s iPad Register app also offers a clear, useful “analytics” screen, showing how much of what was sold when. All of this is free for both you and (except for the usual 2.7 percent Square fee) the merchant.

You set up the phone app by choosing your photo and linking your credit card. Using GPS, the app automatically lists shops and cafes near you that offer the Pay With Square system. If you turn the phone 90 degrees, you see them as pushpins on a map. Square says that 75,000 merchants already accept Pay With Square.

I tried out Pay With Square in a San Francisco coffee shop. I tapped its name and then tapped Open a Tab (a one-time operation).

At the counter, I asked for a mocha and a muffin. While the employee went to get the muffin, I peeked around at his iPad, which was on a countertop mount. To my surprise, it showed photos of two other customers — all of us had the Square app on our phones. The register app uses GPS and other location services to know when these people are in the shop.

When the cashier returned, I said, “I’m David.” He said, “I know,” tapped the screen, and that was it. I’d paid just by saying my name.

Last month, Square upgraded the system to make it even juicier for you, the customer. Now merchants can offer first-visit discounts, 10th-visit rewards and other bonuses; these offers show up on your phone app in the list of nearby merchants.

This article has been revised to reflect the following correction:

Correction: July 20, 2012

The State of the Art column on Thursday, about advances in mobile payments, misspelled the name of a company involved in the technology. It is mPowa, not mPower.

This article has been revised to reflect the following correction:

Correction: July 19, 2012

A caption with an earlier version also described incorrectly how Pay With Square works. Customers with the app on their smartphones are recognized automatically, without the need to swipe a card. (The picture was of a regular Square transaction using an iPad.)