The market for tools that help consumers buy goods using mobile phones is getting crowded, inundating small businesses, putting off venture capitalists and making it hard for many payment startups to make a buck.

Just ask Kristy Fassio, owner of a Fit4Mom exercise franchise near Seattle. She’s getting bombarded with pitches from mobile and web-payment companies pledging to provide low- cost, easy ways for her to accept payments for the mom-focused workout classes she teaches. Some don’t even charge fees.

“Generally they are like, ‘We can beat any price you are paying,’” Fassio said. “They try to sell me on zero percent, but then they don’t make any money.”

Not making money – while fine for merchants – is rampant in a mobile-payments market that Crone Consulting LLC estimates has more than 100 competitors. Companies like Front Desk Inc., which Fassio uses, and Flint Mobile Inc. are going head-to-head with EBay Inc.’s PayPal and Square Inc. as well as traditional card-terminal providers, such as First Data Corp.

They’re all vying for a piece of a market projected to reach $235.4 billion in global transaction value this year, up 44 percent from 2012, according to researcher Gartner Inc. That includes money transfers, bill payments and merchandise purchases.

Seth Priebatsch is chief executive officer of SCVNGR Inc., maker of the LevelUp mobile-payment application. Even he says he’s in a “commodity business.”

VCs Bail

Cut-throat competition isn’t the only challenge posed by the mobile-payment boom. The newcomers are not all effectively screening their business customers, raising the risk of mounting losses, said Richard Crone of Crone Consulting, a specialist in mobile payments. Some are experiencing default rates two to three times the industry average of less than 1 percent for in- store purchases, he said.

Just as mobile payments gain mainstream appeal, venture capitalists are scaling back, turned off by the crowded field and challenging economics. Startup investments plunged to $92 million in the first half of 2013 from $370 million in the same period a year earlier, according to San Francisco-based investment bank Rutberg & Co.

Going back to 2008, venture capitalists have poured $1.4 billion into the market, Rutberg said. They have little to show for it. The biggest acquisition was EBay’s $240 million purchase of Zong in 2011. Since PayPal, Jack Dorsey’s Square has been the lone breakout success, achieving a $3.25 billion valuation and an investment from Starbucks Corp., which uses the payment technology in its coffee shops.

High Bar

“Most people who’ve worked on digital payments for a while are a little jaded about yet another company with a digital wallet,” said Jared Fliesler, a former vice president at Square, who now works as a general partner at venture firm Matrix Partners in Palo Alto, California. “The bar is high.”

Startups are also bumping up against deep-pocketed technology companies. PayPal and Google Inc., through its struggling wallet product and related services, have invested more than $1.2 billion in their own mobile-payment systems since 2009, according to Crone.

To differentiate itself, Seattle-based Front Desk provides software that lets customers schedule classes, book appointments, record attendance, and create client profiles. Also important for Fassio was a feature that lets her accept credit-card purchases on her Apple Inc. iPhone, and she was lured by the 1 percent transaction fee, which was lower than the 2.75 percent she was paying Square.

Payment companies that process transactions with plastic typically have to pay a fee for every credit-card swipe and a smaller sum for debit cards. In some cases, the merchants bear the transaction costs, adding to their overall expense.

Merchant Costs

Front Desk, backed by $2.2 million in venture funding, charges merchants a minimum of $20 a month. The product costs 1 percent on the first $10,000 in sales a month and $2 for every $1,000 in monthly revenue thereafter. Plus, customers pay transaction costs and a monthly fee to a third party.

Jon Zimmerman, Front Desk’s CEO, declined to discuss the company’s financials or margins.

PayPal’s transaction margin for its total business was 64.4 percent in the second quarter on $43 billion in payment volume. PayPal had 132 million active registered accounts last quarter and expects to handle $20 billion in mobile payments this year. The company charges merchants 2.7 percent for card swipes on mobile devices and isn’t worried about upstarts trying to undercut its rates, said Anuj Nayar, a PayPal spokesman.

“There are a lot of startups doing clever things, but they don’t have the scale,” Nayar said.

Mobile Offers

LevelUp, a two-year-old mobile-payment application, doesn’t expect to make money from the 2 percent transaction fees it charges merchants, said CEO Priebatsch. Instead, the company is likely to reach profitability in the next four or five quarters by letting businesses send ads and offers to the more than 1 million consumers who use the product, he said.

“Payment processing is a break-even affair,” Priebatsch said. “Eventually costs will be free for merchants.”

Flint, a Redwood City, California-based startup founded in 2011, is trying to stand out from the pack by letting merchants accept cards using their iPhone camera. The company, which has raised about $3 million in venture capital, charges as little as 1.15 percent per transaction and expects to become profitable at the end of next year, said CEO Greg Goldfarb, declining to talk about margins.

Another startup, PayClip Inc., is targeting underserved Spanish speakers in Mexico and the U.S. with its Clip card swiper for smartphones.

“It becomes important to distinguish oneself,” Vilash Poovala, a co-founder of the Silicon Valley company, said in an interview. “While price erosion is going to happen for sure, you’ve got to see how you are driving value for the company.”

Still, for too many challengers in the mobile-payments market, the price war is going to kill margins and make it impossible for them to raise additional capital, said Crone.

“A lot will run out of money,” he said.