PayPal takes on Square with credit-card swiping device

SAN FRANCISCO--When a startup attracts a giant competitor, it's both a concern and a compliment.

And this morning, PayPal confirmed that it's taking on Square, the San Francisco-based startup whose core business is a device that lets a merchant or individual accept credit cards though a cell phone.

PayPal, a unit of eBay, today released a blue triangle device that plugs into the headphone jack of a smartphone. It's called PayPal Here.

President and CEO of eBay John Donahoe opened up the event at Ghirardelli Square in San Francisco, a location chosen because it's a place filled with small businesses and retailers.

"We're bringing PayPal to merchants in the offline world," said Donahoe, before taking a swipe at Square without naming the startup. "This product is better. This product is backed by PayPal. It's backed by 100 million customers...It will be trusted by brands around the world."

David Marcus, vice president of mobile for PayPal, spelled out strategy. One big selling point, he said, is price. The device and app are free for consumers and merchants. PayPal Here will charge 2.7 percent to make a transaction, compared with the 2.75 percent that Square charges. In addition, merchants will receive a debit card that will give them 1 percent cash back, effectively knocking the transaction price down to 1.7 percent.

PayPal is trying to leapfrog Square on features as well, such as the ability to take a photo of a credit card or a check if a merchant doesn't have the device available. "We can accept any form of payment, short of barter," said Marcus.

PayPal Here also has a system for creating quick invoices that a small business person can zap to a client. Marcus used the example of Joe the plumber, who shows up to your house, does his work and then lays out an array of paperwork. "No more of that--you just take your phone and you go," said Marcus.

If PayPal Here doesn't cripple Square, it will likely lead it to add new features and possibly look for more price incentives. Square, which just boasted its doing$4 billion in annual transactions, was founded by Jack Dorsey in 2009 and has raised $168 million in venture funding. Dorsey is also the co-founder of Twitter.

PayPal Here is also taking on Intuit and VeriFone Systems, which offer devices that let consumers pay with credit cards on their phones. But PayPal Here is clearly going after Square, which has a lot of momentum.

A huge part of any payment system is trust and security, and Marcus often mentioned that PayPal fraud management abilities. The service will also will have around-the-clock customer support.

PayPal Here, currently in use with trial merchants, today rolls out in the U.S., Canada, Australia, and Hong Kong. It will hit other countries next month.

"We will push this very actively to our 100 million plus users," said Marcus.

This story was updated several times, most recently at 11:32 a.m. PT, with more details, context, and an updated photo.