Square is running into some problems with its new investment partner Visa. An executive at the mobile payments company confirmed it is re-working its system to encrypt credit card data on the fly. Square now uses a dongle that plugs into a headphone jack and an iOS application to process credit card transactions. While this system complies with industry regulations, it does not take the extra step to encrypt the credit card data.
Now that Visa has joined Square as a strategic investor, the mobile payments company will be redesigning all its dongle to include this built-in encryption. Square did not comment on the financial impact of this change, but it could be costly. Square gives away the dongles for free and makes its money off a 2.75% per transaction fee. It is not clear how Square intends to absorb this extra cost.
In light of the recent high-profile security breach of the Sony PlayStation network, Square is wise to add this layer of encryption and ease customers fear of having their transaction data inadvertently compromised.