Amazon launches a credit card reader to tap the vast physical retail market

In the previous part of this series, we discussed how the physical retail market still constitutes the majority of the retail market despite the e-commerce market growing fast. No wonder pure online players are now looking to enter the physical retail world.

For example, Amazon (AMZN) recently launched a credit card reader. Merchants can use it to conduct payments through a smartphone or tablet. This card reader is similar to Square’s card reader, which we find at various merchants. According to a report from the Wall Street Journal, Amazon will undercut its competitors with low processing fees. Amazon’s 1.75% fee would be lower than Square’s 2.75% and eBay (EBAY) Paypal’s 2.70%.

Lower processing fees are bound to have an impact on its margins, but Amazon is known to sacrifice its margins for revenue growth. Market Realist described this approach in an article titled Why Amazon’s operating margins are declining this year. You could consider exchange-traded funds (or ETFs) such as the DJ Internet Index Fund (FDN) and PowerShares QQQ Trust (QQQ), which have high exposure to Amazon.

Must-know: Why did Amazon launch a mobile credit card reader?

Merchants are already embracing mobile card reader technology

According to a report from Business Insider citing Market Strategies International, mobile card readers are already accepted by 40% of the small and medium merchants across the U.S., as the chart above shows. Square is a leading player in this market. It recently raised $100 million at a valuation of $6 billion, according to a report from Fortune.

Prior to this valuation, Square had raised funding from a number of investors, including Starbucks (SBUX). Starbucks invested in Square in 2012 at a valuation of $3.25 billion. This was part of a broader arrangement to process payments in its stores through Square’s technology. But with Amazon coming into the fray—and that too with lower processing fees—Amazon will increase competitive pressure on Square.

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