How PayPal Here aims to be a full-service financial product for small businesses

PayPal’s Here mobile payments products represent a direct assault on Square, and the company adds in a few features that would take some effort for Square to replicate.

The new product also provides some invoicing and tracking functionality that could be good enough for some businesses that were considering Intuit’s Quickbooks software.

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Among the significant features from the Here launch:

• Immediate funds availability for credit card and PayPal transactions. Once a business has processed a transaction, the money can be spent using PayPal’s debit card or withdrawn from an ATM. For cash-strapped businesses, this could be important. Square isn’t exactly a slouch at making money available — money from a transaction I processed on a Saturday night was available at my bank the following Monday — but it’s not immediate.

• Ability to accept checks. Businesses can take a picture of a check and deposit it into their PayPal account. (This money is not immediately available.) This has an added benefit in that businesses may choose to use PayPal in place of a bank account. That means lower credit card fees for PayPal because that money can be re-spent without hitting the credit card networks.

• International availability. PayPal Here will also be available in Canada, Hong Kong and Australia.

Here’s fee structure is essentially the same as Square’s. Instead of Square’s 2.75 percent, Here charges 2.7 percent. That difference isn’t meaningful. If a business has enough volume that they’re worried about a 5-basis point difference, they shouldn’t be using either Square or Here.

In the presentation, PayPal claimed that if a business uses the PayPal debit card, which offers 1 percent cash back, that the effective rate is 1.7 percent. That’s a ridiculous claim. I take money that I get from Square and deposit it in my bank account. Then I use my Starwood American Express card to spend it. I value those points at 2.5 percent. So using PayPal’s logic, my effective rate on Square is 0.25 percent.

Like Square, PayPal charges 3.5 percent plus 15 cents per transaction for credit card sales where the number is manually entered. PayPal also offers the option of taking a picture of a credit card, but those transactions are charged at the higher rate. This is mostly a gimmick — image recognition technology isn’t good enough for this to be more efficient than typing in a number.

PayPal also competes with Square’s Card Case product, allowing consumers to use the PayPal app to let a business know they are approaching and just pay by name and picture. Unlike Square, PayPal will not be immediately offering an iPad app.

PayPal didn’t announce a distribution strategy, but eBay CEO John Donahoe told CNBC’s Jon Fortt that the goal is to use word-of-mouth among “millions” of existing PayPal merchants. By contrast, Square is available at more than 11,000 retail locations in the U.S., including Apple stores, Target and Best Buy.

“Neighborhood retail locations are an important resource for small business owners to discover new opportunities and technologies that can help them grow,” said Katie Baynes, a spokeswoman for Square. “About 85 percent of the U.S. population is no more than 15 minutes away from a Square card reader.”

Here addresses two concerns about Square’s hardware: encryption and spinning. As I noted yesterday, other competitors have made an issue of the fact that Square’s reader doesn’t encrypt credit card numbers. The reader isn’t compliant with the industry’s PCI standards, but more secure than Square. I don’t consider it a meaningful risk, but that might spook some. The bigger concern is that Square’s reader spins, making it difficult to get a swipe to go through. Sometimes, I have to swipe 7 or 8 times before it takes. (Square has a video on its site explaining how to swipe properly.)

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The biggest — and most important — unknown is how elegant the user interface is. That’s an area where Square excels.

But based on the initial announcement, PayPal Here is a credible product that plays to PayPal’s strengths. The good news for Square is that PayPal didn’t go for the jugular and compete aggressively on fees.