It’s David vs. Goliath for Square and PayPal

Today, eBay subsidiary and online payments industry leader PayPal introduced PayPal Here, a dongle and software combination for mobile devices that competes directly with Jack Dorsey’s startup Square. PayPal made a point of outlining exactly how many advantages it has on Square (though it didn’t name the competition) during its press conference unveiling Here, and on paper at least it would seem to have a considerable lead. It’s cheaper for merchants to use (flat, all-in fee of 2.7 percent per transaction, versus 2.75 percent for Square), international reach, more flexibility in terms of payment options, and an established name in the online payments industry that’s already in use by millions of customers worldwide.

On paper, though, is a world away from in practice, and that’s what Square user and independent professional computer services provider Dave Greenbaum pointed out in an interview with BetaKit. “It’s the Microsoft Zune or the BlackBerry Playbook […] Paypal is missing the point: it’s not about fees or the reader, it’s about the big picture,” he said. “Square is fun, hip and fresh [while] Paypal, owned by eBay, is a behemoth of bureaucracy, frustration and mistrust.”

Greenbaum, who has used both PayPal and Square’s merchant services, said he’s been burned by the eBay-owned company so much that even though it appears to be a better business proposition from a strict accounting headache, he said it isn’t worth the effort. “I was an early adopter of PayPal way back in the beginning when they gave you $5.00 just to open an account,” he told us. “Over time I trusted them less and less as they interfered more and more with my transactions. My merchant services should be transparent to my business, I shouldn’t have to think or worry about it. I would with PayPal.”

He’s not alone. A simple search of Consumerist reveals a litany of complaints against PayPal and its business practices, many of which are the result of practices that tend to favor the consumer at the expense of the merchant. It’s something merchants will likely keep in mind, considering that transactions made through PayPal Here for in-person purchases are subject to the same complaints resolution mechanism currently in place for online deals, as PayPal Canada Managing Director Darrell MacMullin told BetaKit in a phone interview.

MacMullin also pointed out that PayPal is already a trusted resource, used by millions of consumers worldwide, and Greenbaum likewise admitted the ease of transactions on the consumer side will undoubtedly make PayPal Here a hit with buyers. PayPal also updated its mobile app today, making it a mobile wallet with more reach than either Here alone or competitors like Google Wallet.

Unlike the competition, MacMullin noted, PayPal “didn’t want to come to the market just with a card reader,” since that leaves a lot of opportunity on the table. Instead, PayPal is bringing an app that can handle a variety of payment methods, manage and track inventory and more.

“The way PayPal works, it’s much more comprehensive for small- to medium-sized businesses that just want to manage their business overall,” MacMullin said. “We’ve put basically an order management system into this app, so you can take orders, and then once a person is ready and willing to pay, you can accept a whole slew of payment options.”

PayPal’s card reader is also encrypted from day one, something Square promised to change about its own reader back in April 2011, but so far that has yet to actually happen. MacMullin says this helps give both consumers and merchants additional peace of mind that their transactions are secure.

In the end, PayPal’s focus may be more general than Square’s; the latter company is generally targeting small merchants who weren’t previously accepting credit cards, but who want to start. PayPal is offering small- and medium-sized businesses yet another payment option, and one that will likely resonate well with consumers. PayPal is even kicking off its pilot program by targeting its preferred merchant partners first, and then expanding the pool via a sign-up list later on, indicating that it isn’t so concerned with newcomers to credit card transactions.

PayPal may have a challenge ahead in terms of winning over merchants, if Greenbaum’s perspective is a good indicator, but even he admits he “love[s] paying for things via PayPal as a consumer,” so demand may force the hand of vendors regardless. And even if they aren’t aiming at exactly the same space, Square still now has to deal with the fact that PayPal may be well-positioned to cap its attempts to grow beyond the mom and pop merchants it’s depended on to succeed thus far.

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