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Square Risks Losing Its Simplicity

NEW YORK (TheStreet) -- There is beauty in simplicity. This is the lesson of Square.

While most attention was focused on the company's dongle and ability to process transactions using wireless networks, the real beauty of the payment system was always its one-size-fits-all pricing. It's 2.75% of transaction volumes, period.

Contrast that with what banks and the payment industry's middlemen charge and you may find that attractive, especially if you're a small merchant, a new merchant, someone selling yoga classes on the beach or paintings at a fair.

But if you have experience, and a track record, or if you have multiple stores, that simple deal is not so good. No matter. Square is looking for other ways to serve, and at the same time increase its take.

OK, so the idea of Square gift cards didn't take off, and Reuters reports they're dropping it. But maybe Square can take its small merchants online, and give them a one-size-fits-all e-commerce strategy, as Reuters also reports.

This is what makes Square's hiring of Gokul Rajaram, as reported by TechCrunch , so intriguing. Rajaram had been with Facebook (FB) since selling it his Chai Labs start-up in 2010, but before that he was at Google (GOOG), where he was known as the "Father of AdSense," the company's advertising technology.

Rajaram's charge appears to be to get those small merchants traction online, and if he can do it he will transform the company. That one-size-fits-all processing deal sounds smart, at first, but growing merchants are subject to being poached at any moment. Unless you can give them a compelling reason to stay, like more sales.

Trouble is, the Square Market puts the company into a new ballpark, against companies like Amazon.com (AMZN), eBay (EBAY) and Google, which also sport logistics solutions, as well as the old Web hosting companies, including Yahoo! (YHOO).

Square is coming at this through the back door, through payment processing, something rivals in that area like Visa (V), MasterCard (MA) and Discover Financial Services (DFS) might have never imagined.

That is because once you scale payment processing, it's more like banking than like any tech product, even though the processing can get very, very complicated, with debit and credit and regulations both public and private. (Full disclosure. My wife has spent her career as a programmer in that area and that's all I know about it, that it's complicated.)

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