How Amazon Intends to Crush Square in Mobile Payments

Updated from 12:05 p.m. to include statement from Square.

NEW YORK (TheStreet) –– Amazon (AMZN) is taking on payments stalwarts PayPal and Square in another move to build market share at the expense of short term profits.

Amazon Wednesday announced Amazon Local Register, a card reader and mobile app that will allow local businesses to accept credit and debit cards from a smartphone or tablet, much the way Square does with its Square Reader. Amazon said it will charge merchants a 1.75% rate per transaction for customers who sign up for the service prior to Oct. 31. Accounts that sign up after Oct. 31 will have the standard 2.5% rate on all transactions, and manually keyed in transactions will cost the merchant 2.75%.

By contrast, Square takes a 2.75% flat fee on all transactions.

The market for mobile payments is an enormous opportunity, and one that Amazon appears right to move into, said B. Riley & Co. Scott Tilghman analyst, who believes the new service should help Amazon in the long run. In a phone conversation, Tilghman said in addition to competing with others offering similar services, Local Register will help Amazon learn what people are buying locally. That will allow the e-commerce giant to better "target markets," according to Tilghman, and ultimately compete with those merchants using the new payment system.

Industry research firm Gartner expects mobile payments to grow to $721 billion by 2017, with more than 450 million people using the method to make purchases. 

Amazon Local Register works with several iOS devices, including the iPhone 5s, 5c and 5, as well both the iPad and iPad mini. It also works with several Samsung phones, the Samsung Galaxy S3, S4, and S5, and the Amazon Fire HD and Amazon Fire HDX tablets. Curiously, does not work with Amazon's own Fire phone just yet. Amazon said compatibility with the Fire phone is "coming soon."

Beginning next week, the card readers will be available at Staples (SPLS) retail stores nationwide.

Amazon is also using its hardware prowess to beef up its offering. In addition to the $10 card reader (Amazon will refund the cost after the first successful transaction) that its offering, the company is bundling its 8.9-inch Kindle Fire HDX tablet for $380, to allow businesses to both read the credit cards, and process the actual transactions. Amazon also announced, "Kindle Fire HDX owners can take advantage of the Mayday button to connect to an Amazon tech advisor 24 hours a day, 365 days per year – for free."

The move into payments comes at a time when investors are increasingly unhappy with Amazon. In late July, Amazon said net sales rose 23% from the first quarter to $19.34 billion, but the company reported a net loss of $126 million, or 27 cents per share. Analysts polled by Thomson Reuters had expected a loss of 15 cents a share. Amazon blamed the second quarter loss on the large number of new investments it had made. On the earnings call, CFO Tom Szkutak said, "The increase in capital expenditures reflects additional investments in support of continued business growth consisting of additional capacity to support our fulfillment operations and investments in technology infrastructure including Amazon Web Services." Amazon also forecast an operating loss for the third-quarter between $810 million and $410 million, well above expectations of $25 million.

Shares of Amazon have fallen 7.5% over the past six months, compared to the 4.2% gain in the NASDAQ.

Despite the increase in losses, Telsey Advisory Group analyst James Cakmak agrees Amazon’s move is a positive for the company. In a phone interview, Cakmak said Local Register "is another step in the grand plan for Amazon to be a more effective local player. Being a lower cost provider of goods and services should help them gain share against brick and mortar competition."

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