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Square Gathers Early Adopters, but Competitors Loom

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Detroit has never been known for jumping quickly on new technology. So when mobile payments startup Square picks up enough early adopters in Motown — and no, I'm not talking about the city's drug dealers — to prompt a trend story in the local media, it's an indicator of an increasingly cashless future, and a good sign for Twitter creator Jack Dorsey's new baby.

Or maybe just a good sign for the bigger rivals gearing up to eat Square's lunch.

Square, which investors recently valued at over $1 billion even though it's not yet profitable, offers merchants a free, one-inch credit card reader that plugs into smartphones and tablets.

With a 2.75% transaction fee, it's cheaper than running a card through a traditional terminal. It's also dead-simple to set up and doesn't require a credit check. That makes it a boon for the smallest of vendors, like mobile T-shirt vendor DetroitGT, whose owner tells The Detroit News he's no longer losing sales to cashless customers who don't come back when he points them to an ATM.

That's the kind of convenience that led venture capitalists to pump $100 million into the 9-month-old company late last month, and it's why analysts think you'll be scanning your card into someone's phone in lieu of cash before long. "Mobile money is the next big thing," Yankee Group senior analyst Nick Holland tells the Wall Street Journal, predicting $984 billion in mobile transactions in 2014, six times the figure in 2010.

So with Apple offering its device in stores, and heavyweights like former Obama economics chief Larry Summers and Sun Microsystems (JAVA) cofounder Vinod Kholsa on the board, Square would appear to be in a good place. But emerging competition from some very imposing rivals has Dorsey, the CEO, in a flop-sweat.

Google (GOOG), unsurprisingly, is getting into the mobile-payments game, with an upcoming app called Wallet that lets users pay retailers using their phones. (Square released a similar app in May.) Financial software firm Intuit (INTU) started offering its own Square-like device last winter, prompting a brief price war with Square. And PayPal has its own new mobile-payments offering in the works.

According to the Journal, Dorsey's response to all this has been to push his staff to skip vacations and put in 12-hour days, even telling one engineer to cancel his own out-of-town bachelor party. The measures have led employees to complain of burnout in a staff meeting with Dorsey.

It's easy to see where the worry comes from: With no upfront costs for these services, there's no reason for Square's existing merchants to stick with it if a better offer comes along. A mega-rich firm like Google, launching a new card-scanning system, could decide to forego some profits and squash Square by offering a fee too low for it to match.

So all indications are that you'll have less and less need to carry cash in the next few years, and Square's innovation is partly to thank. But until the big players' moves all shake out, it's too early to say whether Square can keep its early foothold.
POSITION:  No positions in stocks mentioned.