Smartphones, iPads become the new cash register

We've all seen the dreaded "cash only" sign on the windows of restaurants or mom-and-pop shops that don't accept credit cards.

But the growth of smartphones has enabled retailers and consumers to explore alternatives that make paying with credit cards as simple as tapping on the screen of your cellphone.

Smartphones are increasingly being used as a shopping tool. Nationwide, an estimated 123 million smartphones will be sold this year, according to Strategy Analytics, a Newton, Mass., firm. And by 2014, half of all mobile phone users worldwide will be using their phones to pay for goods in stores or online, according to Juniper Research, a UK firm.

Around Sonoma County, the hot item hitting the streets is Square, a mobile credit card reader that plugs into the headphone jack of a smartphone or tablet.

At Santa Rosa's Wednesday Night Market, retailers selling frilly headbands and turquoise jewelry raved about their new ability to easily accept credit cards. Many had iPhones with the Square Card Reader. After retailers swiped the cards, customers would sign on the seller's smartphone screen and get a receipt in a text message or email. The system also works on iPads and Android devices.

"It's a lifesaver," said Erica Gallo, 40, a Santa Rosa artist who fashions leather skirts and accessories out of recycled materials. "I did this for a year and a half without Square, and even though it takes money from me, it's tripled my income."

Square, based in San Francisco, launched its mobile credit card reader in October 2010, and it took off. More than 2 million individuals and businesses now use Square, and the company processes $6 billion a year in payments, spokesman Aaron Zamost said.

It accepts all major credit cards, and charges the vendor 2.75 percent of each sale when a card is swiped, and slightly more if a credit card number is manually entered. Then Square pays an undisclosed portion of those fees to the credit card companies.

"We're trying to keep prices as low as possible for small businesses," Zamost said.

The customer's credit card data doesn't stay on the phone, and is encrypted at the moment the card is swiped, Zamost said.

The company also offers Square Register, an app that retailers can use on an iPad to manage their businesses.

Sift cupcake and dessert bar in Santa Rosa uses Square Register to track company finances and pinpoint which cupcakes were best-sellers at an event. The technology has opened up a new avenue of sales for the cupcake crew, which often sells sweets at festivals and food truck events.

"To be able to, on the spot, make that sale and make that connection, is great," said Rebecah Samo, event and promotion manager at Sift.

A year ago, Square transactions sometimes were slow at festivals, when cellphone networks were overloaded, but that hasn't been an issue this year, Samo said.

"If you've been a merchant before with credit cards, this is awesome," said Leticia Tijerina, owner of Hand Made by Elle. "You come out saving probably at least $50 a month, and you don't have to have paper, you don't have to buy the machines ... I love it."

Before, as a vendor accepting credit cards, Tijerina had to submit to a credit check, and her credit score impacted the rate she was charged for transactions. Not so with Square; there is no credit check to get started. Traditional card scanners cost Tijerina about $1,000, plus monthly fees, a hefty sum when her weekly sales amount to about $200 to $500. At flea markets and festivals, she battled with the machine's dwindling battery life.

"I just keep this little thing in my purse at all times," Tijerina said of the reader. "It's worth it, because everyone wants to pay with credit cards, and they spend more."

PayPal, one of the earliest online payment systems to catch on among online retailers and consumers, arrived later to the mobile payments game. In March, the company launched its competing product, PayPal Here, which includes a credit card swiper that attaches to a cellphone the same way that Square does. Last week PayPal bought card.io, a startup that enables credit card scanning with a smartphone's built-in camera.

Local Girl Scout troops began using smartphones to accept credit card payments for cookies this spring. The troops used an attachment called GoPayment made by Intuit, a Mountain View company. That payment system also includes a credit card swiper that attaches to an iPhone, iPad or Android phone. Like Square, data is encrypted when the card is swiped and it isn't stored on the phone.

Before, the Girl Scouts rented credit card machines from Wells Fargo, but due to the cost only three machines were available to troops in a five-county area, said Dana Mallozzi, product sales director for the North Coast area of the Girl Scouts.

"Most people have an expectation that almost anywhere they go, a debit card will be accepted," Mallozzi said. "So for the longevity of our product sales, as the times are changing, our business model needs to change too, to accommodate our customers and their preferences."

Consumer applications that would allow smartphone users to make purchases with only their phone have been slower to take off. Google Wallet stalled since its launch in May 2011, limited because it works only on Sprint phones and with Citi MasterCard or a Google Prepaid Card. At a local Peet's Coffee, a manager said that since the Google Wallet scanner was installed a year ago, only one customer has used it to pay for their morning brew.

While dozens of companies are competing to build apps to allow customers to pay online with just a tap of the phone, it's a challenge to gain a critical mass of customers and retailers that download and use the feature. Starbucks is one company that has succeeded, and at a Santa Rosa location about 20 percent of customers are paying with smartphones, said salesman Trenton Williams. Customer Samantha Donohue switched from Peet's to Starbuck's because of the app.

"I'm more of a Peet's drinker, but my husband and I started coming here because of the incentives," Donohue said. "It's a really cool product."