Credit Card Payments on Your iPhone

As a rule of thumb, small retailers see sales increase by more than 5 percent soon after beginning to accept credit-card payments. Sales of clothes, gifts or other nonessentials often climb a dramatic 10 percent. And yet many small shops in the United States and Europe refuse credit cards. Why? For many merchants, opening and managing an account for credit-card sales is prohibitively expensive. Others are shut out by red tape.

The creator of Twitter, Jack Dorsey, may have a solution. His new Silicon Valley startup called Square says it is poised to knock down these barriers to business—with a gizmo, not much bigger than a sugar cube, that plugs into the audio jack of an iPhone. Square's service, to be launched soon, will make it possible for pretty much any American—even those without a business—to accept credit cards almost effortlessly. The gizmo, which reads magnetic strips on credit cards, is free. Its software is free, too. There is no sign-up fee, no monthly charge, no confusing contract, and no obligation to actually use the service, also called Square. By lubricating informal, person-to-person buying and selling, Square is likely to nudge up America's GDP, says David Robertson, publisher of The Nilson Report, a Carpinteria, Calif.–based trade journal about electronic payments.

Square is beguiling. A buyer swipes his credit card and signs the iPhone's touchscreen. A photo of the card's true owner appears on the screen; if it's the right person, the seller taps a button, the transaction goes through, and the buyer receives a receipt by e-mail or text message. For now, testers use iPhones, but soon other phones, including the BlackBerry and Google's Droid, will work. Investors have jumped on board because the system is "simple and beautiful and elegant," says Gideon Yu, a former chief financial officer of Facebook, now partner at Khosla Ventures, the Silicon Valley investment firm that recently raised $10 million in three weeks for Square.

Square has not said when it will expand abroad. Nonetheless, its future in Britain looks especially bright, says Jemma Smith, spokeswoman for the Payments Council, a London-based grouping of the two dozen biggest British banks. The council has decided to eliminate checks, which are slow and inefficient, nationwide by 2018. Smith sees mobile-phone credit-card readers as a "big, sweeping change" that will speed up the phaseout.

Already, competitors are springing up. This month, VeriFone, in San Jose, Calif., will launch a different iPhone credit-card service, for legal business entities that have been vetted. Even so, PAYware keeps the potentially hackable iPhone handset "out of the security mix" by encrypting data in the reader before sending it along to the iPhone itself, says VeriFone marketing VP Paul Rasori. That underscores a key worry, which is that these embryonic payment systems are unprepared for the onslaught of illicit attack software that will inevitably become available. Moving stolen money, especially internationally, is risky, because governments closely monitor bank wires. But sneaking money through credit-card networks disguised as simply payment for a purchase could be safer. Yu, the venture capitalist for Square, says a "large arsenal" of security systems will be deployed. Much depends, for consumers and companies alike, on just how good those up-the-sleeve protections turn out to be.

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