Amazon's New Secret Weapon: A Credit Card Reader

Not content with dominating online retail, Amazon.com (AMZN -1.65%) is looking to muscle its way into your local mom-and-pop shops with a new credit card reader. The company on Wednesday unveiled Local Register, which allows small merchants to swipe credit cards using a tablet or smartphone.

Local Register will go head-to-head with Square and eBay's (EBAY 0.31%) PayPal, both of which have similar devices. Unlike Square and PayPal, however, Amazon doesn't seem intent on making this payments-processing business profitable. Instead, it can undercut the competition to gain market share and gather valuable consumer data from brick-and-mortar retailers.

Amazon is entering a crowded space. Source: Amazon.com.

Taking a swipe at the competition
Amazon is a bit late to the game. Square first offered its card reader in 2010, and eBay followed with PayPal Here in early 2012. Square expects to process $30 billion in transactions this year. PayPal processed $55 billion in transactions last quarter between its online and offline payments services, although the majority of that is still from online.

Local Register looks similar to the competition. Source: Amazon.com.

Of course, Amazon is no slouch when it comes to processing payments. The company has over 240 million active users with credit cards on file -- which is 90 million more than PayPal -- and processed $67.9 billion in transactions through its own website last year. That's still $112 billion short of PayPal's $179.7 billion in payment volume during 2013. 

Still, 94% of commerce takes place offline, where Amazon has basically zero presence. Amazon's plan to go from zero to 60 in card readers is the same as in nearly every other business in which it operates: Undercut the competition.

*Special promotional rate. Regular rate climbs to 2.5% beginning Jan. 1, 2016.
**Small businesses typically pay higher rates than big businesses. 3% is on the high end.

As you can see, Amazon is offering businesses using mobile credit card readers the ability to instantly increase their bottom line by 1% through switching to Local Register. For those small businesses still using traditional card processors -- i.e., the majority of small businesses -- the savings could be even greater.

Additionally, Amazon may be able to win over some PayPal users who are frustrated with the business's notoriously poor customer service. It's one of the selling points Amazon uses on its product page.

Will small businesses take the bait?
Many small businesses already partner with Amazon for online sales. It makes a lot of sense for those businesses to sign up for Local Register, as Amazon offers a suite of analytics that can combine online and offline sales and help owners improve their operations.

Amazon is offering free analytics tools as part of Local Register. Source: Amazon.com.

On the other hand, by partnering with Amazon, businesses are opening up their sales data to a ruthless retail giant. It's not uncommon for a business that has success selling through Amazon to quickly find itself in competition with its onetime partner.

Of course, many businesses can benefit from Local Register without fear of Amazon using its data to compete with them. Restaurants, salons, and other service-based businesses would be smart to take up Amazon's product.

Amazon can still use that data to improve its retail business. If it sees that one of its shoppers often swipes a credit card at a Mexican restaurant, for example, Amazon might start promoting Mexican food-related products like margarita glasses or a quesadilla maker. With 240 million credit cards on file, Amazon is bound to harvest some very useful data no matter who uses the product.

Billions of dollars await
The mobile payments market is growing rapidly. Research firm Gartner expects the industry to grow to $721 billion in 2017, although most of that will involve direct money transfers. Competition is fierce in the space, and other big companies are expected to come into the market. Amazon ought to be able to undercut everyone, taking a loss on the business to fuel its giant retail operations.