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David Marcus, VP of PayPal mobile, shows off the 'Here' dongle at an event on Thursday. Photo: Kim White/PayPal

SAN FRANCISCO â€" E-payments service PayPal unveiled new hardware for its payments system on Thursday, signaling in no uncertain terms the company’s intent to fight Square â€" Twitter co-founder Jack Dorsey’s up-and-coming mobile payments company â€" for the hearts of customers and retailers everywhere.

The new hardware, dubbed PayPal Here, is a triangle-shaped dongle that attaches to the smartphone through the microphone jack and reads credit cards. If you’re familiar with Square’s similar device for mobile phones and tablets, PayPal Here essentially performs the same function, and attaches to the device in the same way.

“This product is better,” said EBay CEO John Donahoe. “It has the most complete set of features and functions of all available products on the market.” Furthermore, said Donahoe, “this product will be backed by PayPal, which means it will go global fast, and will have access to over 100 million customers.”

To date, those 100 million customers have been almost entirely online. With PayPal Here, the company’s aim is to seriously tackle small brick-and-mortar merchants for the first time, a market Square targeted first and where it’s increasingly gained mindshare over the past year. Recently, Square announced it was now processing over $4 billion in mobile payments annually, twice that of the previous year.

As far as mobile apps go, however, Square’s reach extends a bit further at the moment. Currently Square’s app is available on the iPhone and Android smartphones, as well as the Square Register app for iPads. PayPal’s app currently only works for the iPhone, though the company says its Android app is coming soon. (PayPal had no immediate comment on tablet app availability; Square declined a request for comment.)

Along with its online customer base, PayPal plans to undercut Square on price. PayPal Here takes only a 2.7 percent cut of each transaction, compared to Square’s 2.75 percent rate. That .05 percent difference is small, but over $4 billion in transactions, it adds up to $2 million extra in merchants’ pockets.

Those extra points may not be enough to soothe brick-and-mortar merchants whose businesses are still smarting from PayPal’s contribution to the rise of online retail. The squeeze on physical storefronts has only been compounded by major online retailers like PayPal’s parent company eBay and its buy-anywhere system.

PayPal wants to win over merchants â€" and differentiate itself from its competitors â€" by offering more merchant-end features. If they don’t have the dongle for whatever reason, small business merchants can scan credit cards or checks using the smartphone’s camera (a feature which Square lacks). Smartphone app Jumio offers this, though it pales in comparison to PayPal’s integrated payments suite.

“We’re not just about the card reader,” said PayPal North America president Ed Eger in an interview. “We’re about the integration of an entire suite of products.”

Photo: Kim White/PayPal

Merchants who sign up for PayPal Here can also elect to receive a free debit card, which allows instant access to any funds received from customers. So in effect, a merchant could sell his wares using his smartphone, then go grab the cash from a nearby ATM using the debit card. And moreover, PayPal aims to further reduce the effective transaction rate below that of Square’s by offering a one percent cash back on any purchases using the PayPal debit card.

“The true value proposition is for the merchant,” Denée Carrington, an analyst with Forrester Research, told Wired. “PayPal Here supports cash tracking, plastic and checks which are more likely to be used outside a retail environment for fund-raising, donations, etc. This is very much in line with PayPal’s online approach where they recognize that a customer may be a buyer in one moment and a seller in the next.”

E-commerce and personal company Intuit has touted its own mobile payments hardware solution, GoPayment, over the past year. Like PayPal and Square, GoPayment also comes as a dongle, though attaches to iPhones, Android phones and both iPads and Android tablets. Intuit also boasts compatibility with its QuickBooks accounting software, making it simpler for merchants to keep track of all transactions.

“As the mobile commerce space continues to heat up, new competitors entering the market is no surprise,” Intuit VP Chris Hylen told Wired. “We welcome competition in this space as it allows us to build broader awareness for the category, which we estimate to be at about only 10 percent today. In the end though, we’re the better fit for small businesses… [since] we integrate these payment tools with all the other services that small businesses use including QuickBooks.” In short, mobile payment companies won’t just be competing on rates and ubiquity, but on services and convenience, too.

Finally, PayPal’s new hardware debut also comes as Google ramps up its e-commerce efforts, specifically with its smartphone-based payments system, Google Wallet.

But PayPal thinks that Google is going about mobile commerce the wrong way. Google’s uphill battle with Wallet requires widespread adoption of Android smartphones equipped with NFC chips â€" or Near-Field Communications â€" which allow consumers to wave their phones in front of a terminal at the point of sale in order to complete the transaction. Wallet is linked to a user’s credit card account.

PayPal isn’t ruling out NFC entirely, but remains skeptical that the solution will take off. “We aim to be infrastructure agnostic,” Ed Eger, president of PayPal North America, told Wired in an interview. “If NFC ends up working, we’ll be there.”

But NFC requires massive infrastructure overhauls on the retailer’s side, as POS terminals require updating their hardware to recognize the NFC devices. What’s more, there is a dearth of NFC Android devices on the market, a major problem for getting the payment method in the hands of consumers. And this is all complicated by Google Wallet’s recent security scare, which made headlines after Google Wallet was hacked by security researchers. (Google did not immediately respond to a request for comment.)

“We think starting at the technology level is the wrong way to look at this,” Anuj Nayar, PayPal director of communications, told Wired in an interview last week. “At the end of the day it’s not about the tech, it’s about solving the consumer friction point.”