Co-founded by billionaire Jack Dorsey, Square was the first to give people a free mini card reader to plug into a mobile device and accept credit and debit cards on the go. Square's charm is in its simplicity--there are no hidden fees and you only pay a flat rate of 2.75 percent per swipe or $275 a month and nothing per swipe.

Some big guns have tried to get in on this action. With similar flat-rate models, you can also use your phone or tablet to accept payments with a slew of copycats, such as PayPal Here, Intuit GoPayment, and PayAnywhere.

But now another company wants to be your digital cash register: Punchey, a Boston-based start-up that just came out of beta targets small businesses that typically charge customers higher dollar amounts. Since August Punchey has processed more than 50,000 payments totaling $25 million for 500 companies.

How It's Different

According to founder and CEO Nathaniel Stevens, Punchey isn't trying to mimic Square's pricing and is instead using a "pass-through" model in which it charges merchants the actual interchange fees set by Visa and Mastercard plus .75 percent and $0.10 per swipe.

The company says a typical $100 debit transaction would cost $1.24 with Punchey and $2.75 with Square; a $100 Visa credit card swipe would cost $2.41 with Punchey and $2.75 with Square. Punchey is able to undercut Square on debit transactions because of the Durbin Amendment to the Dodd Frank Act that went into effect in late 2011 which capped how much banks could charge for them.

So even though Square is paying a smaller amount of interchange fees to process debit cards, its flat rate doesn't differentiate between debit and credit, whereas Punchey's model reflects the lower interchange fees for debit transactions.

Even so, Stevens admits Square is a good option for companies that have a high volume of small-dollar transactions and says Punchey is better for businesses that typically charge higher dollar amounts.

He says that while the government capped the percentage fee that banks could charge, it increased the fixed amount they could charge--as much as $0.23 cents per transaction. So if you're selling a $1 item a $0.23 fee is obviously too much and in such a case Square is actually eating some of the cost of the transaction by only charging 2.75 percent.

"As the dollar amount goes up that fixed fee becomes inconsequential," Stevens says, pointing out that the breakeven point where companies can save money with Punchey is an $18 debit card transaction and a $67 credit card transaction. Essentially, coffee shops are going to want to stick with Square but auto mechanics, plumbers, and lawyers could save on transaction fees with Punchey.

The Hardware

Another thing that's different from Square is the cost of hardware. Punchey says it's giving away the first 1,000 mobile device card readers ordered after its launch out of beta June 18; after that, they're $19.95. Hardware for PCs or Macs--currently a signature reader and swiper--costs $199 in total. Stevens says a combination reader/swiper is coming later this year.

While a lack of a free card reader after a certain point might be considered friction by some, Punchey is banking on other features to make up for it.

For one thing, it aims to help brands with reputation management. For example, at the end of every transaction you can email or text a receipt to a customer as well as a review request that asks a customer how well you met his or her needs. The goal is to get customers to praise or complain to you first, as opposed to grandstanding on Yelp or your Google Local page. Depending on the kind of feedback a customer provides you could either post it on your company's Facebook page or website or respond directly to an unhappy customer.

"What we found is that merchants are always looking for feedback on things that are going really well in their business and things that maybe aren't going so well," Stevens says. "What we do is allow merchants to take control of the conversation."

Is It Enough?

The question is whether Punchey can make serious inroads in the Square-dominated mobile payments space. Square says that it has more than three million individuals and businesses on board and processes $15 billion in transactions a year, not including the credit and debit transactions it handles for 7,000 Starbucks locations.

If his track record is any indication, Stevens certainly has the chops to attempt such an ambitious goal.

He co-founded and still remains a shareholder in Yodle, an eight-year-old New-York based online marketing platform for small businesses that has 30,000 customers, 1,000 employees, and revenue of $132 million a year. Yodle is on track to become the biggest company to ever land on Inc.'s 30 Under 30 list.

Published on: Jun 20, 2013