Twelve years ago the e-commerce world was turned upside down when PayPal was founded. It was the solution to money orders, checks in the mail and the still uncomfortable credit card purchase for goods on the web. PayPal came out and Internet buyers no longer had to worry whether their credit card was going to be intercepted by some nefarious hacker and sellers didn’t have to wait for checks to clear before shipping a product.

It was revolutionary for its convenience, safety and near immediate ubiquity. The 2002 purchase of PayPal by eBay seemed about as appropriate as any other acquisition, a much smarter decision than the Skype purchase in 2005. I’d wager that as much as half of eBay’s users already thought PayPal was owned by eBay, only once can I remember using another form of payment than PayPal.

PayPal’s reign on e-commerce lasted over a decade and managed to make it beyond eBay into the mainstream Internet marketplace. However, the problem they were once solving was under fire from other companies like Google and Amazon with their universal logins for making purchases all over the net and Visa’s Secure Pay authorization system.

Purchasing items over the Internet is no longer a risky, scary or cumbersome adventure. We do it more and more every year, much to the chagrin of state and local governments, it’s as natural as handing handing a credit card to the clerk at Target.

There was a new problem on the horizon, one that has existed longer than e-commerce but seemed to have no feasible solution. The problem? How does a consumer easily, quickly and securely pay someone for a product or service in person? We’re back to cash, checks and money orders. Credit card terminals are expensive and PayPal’s solutions aren’t proving to be the panacea they once were.

That’s where Square Inc. comes in. Early this year Square announced their intent to solve this problem by providing a free headphone jack dongle to iPhone/iPod Touch users to swipe credit cards. Instead of requiring both parties to be a member of the service, only the seller needs a Square account. Much like in an Apple Store, a seller is able to swipe a credit card for any amount of money, the buyer signs for it and a receipt is promptly emailed back to to both parties.

The seller can even take pictures of the purchased item and include it in the digital receipt.

That was quite the introduction, I know. It shouldn’t take 400 words to explain the principles behind such a tiny and simple device. Perhaps its complexity comes from its simplicity. How can something that small work and why do I need it? Shouldn’t there be a catch? Expensive iPhone attachment, monthly membership rates, minimum transactions per month or high transaction fees?

If Bank of America had created this device, sure. That would be the case. Luckily they didn’t. There are no membership fees, the dongle is free, no minimum monthly transactions and affordable transaction fees.

• 2.75% + 15¢ for swiped transactions
• 3.5% + 15¢ for keyed-in transactions

The Square dongle worked great on any iPhone/iPod Touch before expanding to the iPad, Nexus One, Motorola Droid, Motorola Droid X, HTC Droid Incredible, HTC Evo, HTC Hero, HTC Desire, Samsung Galaxy S series, and the LG Ally.

When the iPhone 4 came out, with its metal exterior construction, users began reporting problems with swipes not registering and other bugs. The metal on the dongle was shorting out on the metal of the phone.

Edit c/o @Arclite

Looks good, one problem: “The metal on the dongle was shorting out on the metal of the phone.” is incorrect. It’s not technically a short—works fine on the metal rim of the iPad. The problem is that the metal is an antenna and the data passing through the antenna causes interference with the dongle, causing the data to be corrupt.

It took months for the original Square dongle to come out. Learning about this new problem with the iPhone 4 made many Square users wince. Luckily it didn’t take nearly as long to release the dongle as it took to create an all new dongle. It wasn’t long before Square sent out the new and improved dongles, as pictured above.

The new design is thinner, smoother and sleeker. It looks more polished, swipes more reliably and maintains its price point of free. It even includes a hoop for a small lanyard (see the front right in the picture above).

I haven’t had more than a dozen times that I have used my Square but I’m also not someone who sells a lot of stuff. This is huge, however, for street venders, artists, wedding photographers, garage sale people and more. No more cash only, no more prepaying and no more worry about checks clearing.

It’s a solution to an age-old problem that only ingenuity, smart devices and the cloud could solve.

I love my Square and tip my hat to the brilliant people who made it possible!

Oh, and for what it’s worth, Square isn’t the only company in the mobile purchasing game. Intuit recently teamed up with Mophie to create the Mophie Marketplace iPhone case.

Their case is much more professional in appearance, sturdier and perhaps more user-friendly. This comes at a cost however, each case will set you back $180. Intuit also charges $13 each month for access to the service, thought their transaction fees are lower than Square.

• 1.7% + 30¢ for swiped transactions
• 2.7% +30¢ for keyed-in transactions

Which device is the right one for you really depends on how often you will use it. I for one am happy with my Square!