Amazon.com's (NASDAQ:AMZN) attempt to offer credit card processing for brick-and-mortar retailers failed miserably.
This is despite the fact that the online giant offered to charge less for the service than what small retailers are currently paying. Stores balked at handing over sales data to Amazon. They seemed to perceive it as the fox moving into the henhouse, though Amazon claimed to have no intention of mining transaction data for its own purposes.
The service, which launched in August, was killed on Feb. 1 after it failed to gain traction. That's not really a reflection whether it was good or bad -- it seemed like a competitive product with attractive pricing and fees. It was more a statement that retailers weren't willing to turn over their cash registers and point-of-sales operations to a company that competes with them.
In some ways, Amazon was trying to act as a technology company while pretending it wasn't also a retailer. That may work in selling Web hosting via Amazon Web Services, but marketing cash register functionality to its direct competitors made for a more difficult sale, which quickly proved true.
And while the numbers must not have been very large, the closure of Local Register left stores that did adopt the technology without a credit card processing solution as of Feb. 1. To help solve that problem and alleviate the pain it caused, Amazon sent those customers Square (NYSE:SQ) readers. So in some ways, Local Register came full circle. It was launched as a competitor designed to crush Square, and when it failed to do that, the company more or less admitted defeat and sent customers to its former rival.
Is this important for Square?
The overall amount of customers involved is probably negligible, and just because Amazon sent them a Square reader (which costs under $10 on Amazon.com) doesn't mean the stores will elect to use it -- they could elect to go with a bank or any other provider. But what is good for the struggling payment processing firm, which saw its stock price plummet by 33% in January, is that at least one well-funded competitor has left the space.
That's welcome news for a company that's moved past the start-up phase and now must prove it can actually make money. That's a huge challenge for any company, but an even bigger one for Square, which saw a deal with Starbucks, which looked like it would make the company a player in the transaction space when it was signed in 2012, turn into a big money loser.
Just before its IPO, the company announced that it was ending the deal with the coffee chain because it lost $71 million processing Starbucks payments over the past three years, CNN Money reported. According to Square, Starbucks contributed 11% of Square's total sales in 2015, as of October, but accounted for 21% of the company's transaction costs.
Losing, or giving up, its biggest customer may have saved Square money, but it also robbed it of a prominent partner which could have attracted other retailers on better terms. Now, without Starbucks on board, the company needs a whole lot more customers, and Amazon might be able to help.
Amazon could be a good friend
So far, Amazon hasn't endorsed Square beyond sending its readers to customers of its shuttered Local Register service. That could help, because that user base -- small as it was -- obviously has a willingness to use card readers hooked to phones and tablets rather than traditional cash registers.
Those customers may well make the switch from Amazon to Square, giving the struggling payment processor a boost. The real gains, however, would be if Amazon actually backed Square as a payment solution to its large retail store customer base and its marketplace partners. That deal -- which hasn't happened -- would be not only be a big positive for Square, but it might also let Amazon take a piece of the action in a way that's less off-putting to store owners.
Square needs Amazon, but if Amazon wants a piece of the retail payment processing business (and it may have decided it doesn't), it needs a third party in the mix that's palatable to store owners. This could be a good partnership for both companies, and it's the type of deal Square may need to remain viable as a standalone company.
At the very least, Amazon has at least subtly given Square its blessing while ending its attempt to put it out of business. That makes things a little less crowded in the payment services space, which could help Square add customers and work toward profitability even if the online retail leader doesn't elect to create an actual partnership.
Amazon hasn't saved Square, but it has made it a little easier for the company to survive and maybe thrive. That's a small positive for a struggling company, but it's better than where it stood last August, when Amazon announced it was becoming a competitor.
Daniel Kline has no position in any stocks mentioned. He loves the Starbucks app and uses Mobile Order & Pay often. The Motley Fool owns shares of and recommends Amazon.com and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.