Mobile payments firm, Square, is reportedly raising a USD200 million funding round that would value the company at USD3.25billion, highlighting the company’s rapid growth over the past few years. According to New York Times sources, the round will be led by Suhail Rizvi, head of Rizvi Traverse Management, a small private equity firm that has also invested in Twitter. This is the latest in a string of important milestones for Square, which lets users make credit card payments using a smartphone plug-in and now claims to process USD6 billion in mobile transactions annually as it seeks to gain a lead in the burgeoning mobile payments space.

First rumoured around April this year, this will be Square’s third substantial funding round in two years, after a USD100 million boost in 2011. Although this round means Square has doubled its valuation in the space of a year, it falls shy of the valuation of between USD4 billion and USD5 billion that was previously reporter. Big VC backers are notably absent from this round, leading commentators to suggest that the appetite for investing in late-stage tech firms may be tapering off. While impressive, the funding comes as a double-edged sword, heaping pressure on the young company to prove it can live up to this lofty valuation. The rocky performance of highly-valued companies such as Facebook, Groupon and Zynga is casting long shadows over the tech market, prompting fears that the hype surrounding certain companies is artificially inflating their values beyond what they can actually live up to.

Square needs this funding in order to compete with the raft of mobile wallet services from the likes of Google, Isis and Visa coming to market, as well as established payment firms diversifying into mobile. PayPal is probably Square’s biggest threat, with the firm launching its own plug-in card reader, PayPal Here, to target the local businesses that are Square’s lifeblood. PayPal claims that it signed up 1,000 merchants in the first 24 hours of availability and is also attempting to undercut Square by taking a smaller slice of transactions, at 2.7% rather than 2.75%. This could prove a key differentiator for young businesses looking to maximise their profits and integrate mobile payments into their wider payments technology, with PayPal offering a range of services.

Nevertheless, Square continues to gather pace in the market, claiming that the volume of payments it is processing grew 20% between April and June and that it is now employing some 300 staff worldwide. The firm has established a solid user base with local retailers, boasting partnerships with more than 1m merchants worldwide. Square’s solid growth over the past year suggests that despite the hype surrounding NFC payment options, there is also space in the market for alternative services.