The SMB payment space has been getting mighty crowded since Square’s 2010 launch. Major merchant acquirers such as PayPal, Groupon, Intuit, VeriFone, Heartland Payment, Swipely, Merchant Warehouse and Total Merchant Services have joined Square in the battle for small spending but high volume merchants.

Some may even be subsidizing payment fees in order to get around Square’s appealing, flat rate 2.75 percent fee (plus transaction). Groupon, for instance, has a 1.8 percent for its clients (plus 15 cents per transaction.) LevelUp waives the fee altogether for merchants who also run an ad program with it.

Now comes Punchey, a Boston-based, 20 person startup launched by Yodle Founder Nate Stevens. Punchey’s pursuing small merchants who typically use their Visa or MasterCard accounts to process payments over $50 (i.e. beyond food truck merchants and quick service restaurants.)

Like others, it hopes to use attractive payment processing fees to win accounts that will use other services, especially CRM, reputation management and marketing in general. It charges .75 percent on top of Interchange costs – which range from .50 percent to approximately two percent, depending on the card type and merchant risk.It includes a ten cent fee that banks charge to connect to Visa, MasterCard and Discover.

Stevens says Punchey will save substantial money for merchants that don’t need to simplify their business to flat but inflated fees – or bind themselves into high commission sales relationships in order to get a low processing fee.

Merchants start saving money on transactions over $18, with merchants saving 59 cents on a $50 transaction, he says. That translates to $4.55 on a $250 transaction, and $9.43 on a $500 transaction.

From Stevens’ point of view, Punchey’s found a niche that has much lower processor attrition rate than Square’s target audience of very small businesses. Moreover, successful merchants tend to graduate from operating with the single, personal cell phone that was Square’s original forte. Punchey’s typical client will have between two and 10 employees, he notes.

The company has been testing with 500 merchants around the U.S. for several months. Today, it formally rolls out a self-serve product geared to mobile service providers and businesses that take cards on the phone, such as carpet cleaners and contractors. It will soon launch a telemarketing effort for Brick & Mortar merchants as well, such as frame shops, bike stores and salons.

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In a reflection of the industry’s ongoing interest in developing SMB promotional and loyalty services, Yodle founder Nate Stevens’ venture fund announced last week that it is putting $1.7 Million into Punchey, a new mobile-oriented payments and promotions platform.

The 12 person, Boston-based firm was founded in late 2011 and is focused on SMB “upstream marketing initiatives,” notes Stevens. Features include promotions, customer communications, digital receipts and analytics. About a dozen SMBs have been testing the service in different markets, with new clients signing up daily.

The company’s ambition is to replace cash registers and stand-alone dial terminals. Vertically integrated POS solutions will be dealt with through integration/partnership. Today, businesses working with Punchey can accept cards via a mobile phone, iPod, any PC using an independent mobile card reader or a countertop card reader that is compatible with in-store computers. While the whole loyalty and rewards space is converging in many ways, the emphasis on alternative POS suggests that it will seek to directly compete against players such as Square.

Stevens sees a natural progression between Punchey and his work at Yodle, which has focused on getting businesses online and developing their Web presence. While there is “a perennial need to upgrade and improve SMB websites, what we learned is that there is also an opportunity on the processing and loyalty/retention side of the house,” he says. “Everything can be tied together, pre-sale, point of sale, post-sale through an intelligent and integrated payment processing engine,” adds Stevens.

Retention is another big focus for the company. “A critical learning at Yodle was that client retention is important, both as a marketing services provider and as an SMB,” says Stevens. “It allows you to reduce advertising costs and increase overall lifetime value and profitability.”

Defining the customer base is also key. “If (SMBs) can’t define their customer base, how can they even begin to communicate and market to them after they walk out the door?” says Stevens. Data from the processing side combined with loyalty programs gives Punchey that capability, he adds

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