Kudos for the "ballsy" simplicity. I don't know if people appreciate how big of a risk this is for Square.
Square is placing a big bet on the numbers working out in the long run. If their analysis is just a little bit wrong, they're going to burn through millions of dollars in losses.
Why? Because the 1.3% "sweet spot" is almost certainly well below their cost. "Interchange" is the wholesale rate that processors like Square pay to card networks. Visa & Mastercard publish their rates and as far as anyone knows they're not negotiable. According to FeeFighters which did a lot of public research around rates, the average interchange rate for a typical card mix is:
1.58% + $0.13 per transaction
Unless they've figured out a way around standard interchange, this is Square's approximate cost.
Remix that into a 2.75% flat rate and you'll find that Square already charges less than that cost for purchases below ~$6 (even considering that there's a special, lower small ticket interchange rate). And now for businesses that hit the sweet spot around $17-21K/month, Square's probably also taking a loss.
No doubt Square is betting on a mix of merchants that fall in the profitable peaks between those troughs. All in the name of simplicity.
Are these numbers truly non-negotiable? If that's the case, what's the incentive for a company like Costco to have exclusivity with American Express (who normally charges a higher than average fee)?
I've always assumed (maybe erroneously) that Costco received a lower processing fee in exchange for the exclusivity which pushes more transactions.
AmEx is negotiable (though usually it's the most expensive.. and Square cannot offer AmEx exclusivity like Costco can). Notice I said Visa & MC are the standardized, non-negotiable rates.
But you're right, they're not totally non-negotiable. Supposedly very huge retailers like Walmart get better rates. But Walmart does probably 20X Square's volume, even with Starbucks folded in.
I don't disagree (in fact, I think it probably is the case that they get a lower rate for being exclusive), but just to add: Costco also has a partnership with amex issuing their Costco branded credit cards (which isn't a store only card, it works out in the wild), and Costco gets some portion of the revenue whenever that card is used. Restricting you to amex also has a benefit of increasing the likely-hood that consumers will sign up for the Costco cc.
That makes a lot of sense, and it's also clear that transparency regarding rates isn't exactly in the vendor or the credit card companies' best interest.
Assuming you can't back in and out of wholesale ($275) versus retail (2.75%) pricing, it doesn't matter how volatile your earnings are - doing 0 for eleven months and x in month twelve is equivalent to doing x/12 for twelve months whether you pay 2.75% or $275 each month.
There are limits (it's still _revolutionary_ for an industry that loves to nickle & dime, though)
Up to $400 per any single transaction and up to $250,000 in total transactions per year—or approximately $21,000 per month. Swiped transactions over these limits simply cost 2.75% per swipe.
$21,000 * .0275 = $577.5 in fees.
I would love to see more Square adoption. In Charleston, lots of cart vendors (hot dogs, popsicles) use Square, as well as many vendors at the farmers market.
Don't forget the up-front fee of $275, so max savings are more like $300. Break-even is $10k per month.
It's a nice idea, though I don't know how many companies are in the $10k-$21k/month revenue bucket that would see a benefit. All companies processing over $250k per year can save a max of $300 per month by signing up to the fixed rate plan and then paying the normal fee thereafter.
The new fee band gives savings to those processing more than ~$10k/month, but provides no savings for smaller users.
It's not strictly for the band of $10k to $21k per month. It's anyone that makes more than $10k a month because additional swipes after $21k are the same as the opportunity cost.
This is a great deal for any company making more than $10k a day, or about $500 assuming 20 working days a month. It's starting to sound like a decent deal that should appeal to a lot of small businesses.
Which is basically anyone for Visa/MC, and even some people for Amex. Once you're reliably processing $20k/mo, your options for merchant accounts expand a fair bit.
I think what this does is retain existing Square merchants a bit longer -- ones who grew from $0 to $8k or so, are now evaluating real merchant accounts. Inertia, other advantages of Square (PWS), etc. might keep those merchants another year or two, getting them up to around $20k/mo revenue, and then Square might come out with something new for them (a Square-specific payment instrument? Pre-loaded cards using ACH per merchant or across Square with 0% fee?)
These limits are in place to keep people like me from gaming the system. Without these limits I would have an Amex Black card with $1M+ in annual transactions, and enough points to cover the $2500 amex fee, and the $3300 square fee.
In college, I financed a spring break trip with credit card points by buying US Savings bonds on a credit card. The US treasury quickly wised up and realized selling bonds without charging a credit card fee was stupid. Even the US treasury got caught up in the first internet craze.
It's definitely targeted at getting more businesses that do $120,000 - $300,000 on credit cards annually.
I'm guessing they were having issues with adoption in that sector so they rolled this out to make it a little tastier.
They probably have the best penetration in the under $120k/year sector, because of the ease of setup, low overhead, no monthly fees, etc.
I have a good friend who runs a small shop (> $50k/year) and she loves square. Got them up and running painlessly, their iPad is their cash register / POS system, and she pays a manageable amount to Square for it. She keeps asking me when Square is going to start doing online payments, because their transactions tend to be small online PayPal's 2.9% + 30¢ is painful in comparison.
Going international, or making such a reader, opens up an enormous market and the potential is huge.
I'm waiting, excited, as I see Square disrupting this business. As tibbon asked earlier in the comments: "why has no one disrupted this market before". I'll think it is a good question, I have no answer, but find it is about time. Ref. http://news.ycombinator.com/item?id=4392763
iZettle would not get a lot of adoption in it's current form.
For merchants the biggest issue around chip and pin cards is this:
If the merchant takes a signature, then they are liable for loss incurred by bad transactions.
Which simply means, very few merchant accept signatures and only in exceptional circumstances.
So any EMV reader in Europe, to achieve adoption by merchants, will need to offer a PIN entry method.
However here is the other part of the deal.
A PIN entry keypad must be secure. In fact, the keys themselves cannot be implemented in software that exposes the key presses to any other software.
Usually this means that the hardware keyboard itself doesn't send keypresses to the OS, it is a dedicated piece of hardware (with screen) that only transmits the hash of the PIN to any external system.
In effect, Square would need to re-design their device to include a PIN entry keypad and screen.
But then the security theatre results in a change of liability that merchants are unwilling to accept, then you are in a position where to get adoption you have to prevent that shift in liability.
Would it be possible for them to just rely on the commodity chip and PIN readers that most banks (in Europe, or at least the UK where I am) use for 2 factor auth for online banking?
Thanks, that's a very important gotcha in current payment systems. Most interesting thinking of ways to work within that seemingly draconian framework!
There are dozens of chip readers on the market all around the world already, they just don't have the software, good design and price structure to match.
1) Why is it just now that someone's actually providing competitive service in this space? We've had people selling CC machines and service for years...
2) Where (in general, not just with Square) does the money actually go? It seems that prior to Square announcing this, getting under 2-3% or so was nearly impossible. On the scale of the US economy alone, that's HUGE money. What are the fixed per-transactions costs? Its just pushing around bits in a system right?
Almost all of the fee structure goes to players much higher up the chain than Square. The networks take a chunk, but in fact most of the fee goes to the originating bank (the bank that issued the card). This is a major source of income for most banks these days and can generally be arbitrarily set by them since merchants not only have no other options except cash, but also cannot tell what their interchange fee would be prior to accepting the charge (except with a flat rate system like Square). So, because processors (Square) do not control the rates, there is no way for entrants to create any real competition around them.
Not to mention that 2.75% is actually kind of high as an overall average and that the rumor is that Square actually operates these fees at a loss currently.
Now, as for 2:
As I said above, most of the fees go to the bank that issued the card (1.5-2.0%), another part goes to the network (VISA/MC), and the rest to the processor (Square). This is indeed HUGE money. It is literally hundreds of billions of dollars of revenue and profit controlled by a handful of banks. A high-ranking employee at a major US bank once told me that if you break down their corporate profits by division, interchange fees alone account for a significant portion of the entire bank's profits!
So, suffice it to say, if we (the entrepreneurial world) can figure out how to create an interchange free system, its inventors could possibly be some of the wealthiest people in history. I happen to have a strong business plan along these lines and would love to share/discuss it with anyone interested. Let me know!
Actually most (depending on the card, the great majority) of those fees end up going right back to the cardholder. Those fees are what pays for all those airline points, cash-back discounts, guarantees and liability protections, purchase insurance etc.
Another way of thinking about credit cards is a way that a large groups of customers are able to band together to collectively demand discounts, rewards and other valuable protections from merchants in exchange for their business.
The banks compete amongst themselves to win your business as a cardholder by trying to negotiate higher discounts from merchants. (the fees paid by merchants are called MDR or merchant discount rate).
Perhaps I'm a minority here, but I actually would more prefer just simple cards that are used for payment than a reward-based card (which is why i have a very basic debit card from a credit union). All the airline points and discounts just strike me as marketing more than a real benefit. US Airlines keeps reminding me of the number of points I've forfeited by not using them enough... as if that will make me want to use them more and still not get free flights.
I've never been into getting mileage or whatever, but rewards cards can be very handy. I basically get 1% off of everything I buy -- I've got a card through Amex with no annual fee that simply sends me a $25 gift card in the mail every time I spend $2500. It's basically effortless -- all I have to do is pay with two cards every once in a while after getting the gift card and buying something for more than $25.
If there are people willing to give you free money you might as well take it. :)
Amex has also consistently given me absolutely fantastic customer service. I'm really not in any hurry for them to be disrupted...
Not to be the debbie downer, as I use rewards cards as well. But there is not such thing as free money. This money you are getting is coming from somewhere. The banks are clearly raking in a$$ loads of cash from the merchant when you use your card. I think it's safe to assume the merchant increases the cost of their goods to offset the fees he pays for transactions. So, the merchant sets his prices 3% higher than he would have to, you pay that extra 3%, get 1% back and think "oh, goodie me, free money", and the merchant breaks even. Sure, you come out 1% above people not using rewards, but it's a net gain of -2%. Credit card companies win.
Like I said, I use rewards cards as well, it's a bit of a tragedy of the commons if you will, everyone just trying to offset their costs for a little, but this just causes the hidden costs to continue to rise.
This is a very good point, I wasn't entirely clear there. I meant free in the context of someone who's already using a debit (I assume processed-as-credit at most merchants) card, yet missing out on many of the benefits offered by many credit cards.
I disagree about the tragedy of the commons part -- specifically that it's any tragedy. In order to keep the discussion simple I'm not going to go into the potential for abuse (which is a serious problem) and the charge-vs-credit card distinction, but overall I find cards to be enormously beneficial compared to cash: I can buy pricier items without having to travel to the bank to take out cash in advance or mess around with checks (an annoying, less-secure system that rather scares me fraud-wise), I can buy gas without going inside the building, I can buy things online with ease, I can dispute charges in case of fraud or if a merchant trys to pull a fast one or never ships me the item (and I've been able to do this successfully), and I wouldn't really be out any money if someone stole my wallet, I'd just need to make a few phone calls and get some new cards overnighted to me. For free. It's tremendously convenient, and to me, completely worthwhile.
It's amazing how quickly the world can change these days: it's an industry that's about a hundred years old that pretty thoroughly changed the world and has already made it to the "unpopular incumbent" stage.
You make good points, I agree with the benefit of cards over cash as well. And who wants to lug around a checkbook when I can just put a small piece of plastic in my wallet? There is definite value in that. Maybe even 3% value. I think CC companies may get the "unpopular incumbent" label because most people are not even aware of how credit cards work, and their costs are often times hidden. I mean hidden in the sense that we don't realize the price increase of goods this convince is costing us. I bet if the apple store started selling mac pros at 3% under retail price for cash, more people would inconvenience themselves to pay in cash. But many people are not properly informed, and therefore do not act as rational players. Many jewelers seem to play in this realm of cutting prices for cash buyers. (I know, there may be other reasons for that, but it's an example of merchants incentiveizing buyers to use cash)
Most merchant agreements prohibit offering a discount for cash purchases. Those jewelers who do it are probably betting that they won't get caught and have their CC processing yanked.
What this means is that in effect everybody pays slightly higher prices in to cover the fees for accepting credit cards.
This is not quite true. They can offer a discount when paying in cash, but they can't charge an extra fee when a credit card is used after the agreement to purchase.
Jewelers are different, they can negotiate price, nobody pays retail at a jewelry store, that gives them flex around these cc agreements you speak of. The other reason jewelers often take cash is they let you off the hook for sales tax, which can be risky for them, yes. The jewelry business is fascinating, and full of "old guard" industry type practices, I didn't get fascinated with it until I started looking into buying a high end watch. But I digress.....
This is definitely not free money. The problem I have with rewards cards is that they lead to higher prices (since the banks aren't gonna give back any of their fees to pay for the rewards) and therefore merchants have to raise their prices to compensate. So it becomes a bit of an arms race -where people who don't use reward cards end up paying more (since they pay higher prices without the small discount from the reward).
The 1% payout you describe seems to be about the max that customers end up with. Maybe some store specific cards are slightly higher, and maybe the right airline miles.
There are several cards that give 2% flat on all purchases. You can also do much better if you use specific categories across multiple cards, for example there are cards that give 5% for restaurants.
I'm dubious. I just glanced at my interchange plus billed Merchant Account Statement, and the highest I saw was 2.95% + 20 cents for a couple international business rewards cards. I suppose you could count this as 5% for an under $10 purchase, but do you have a specific example of a card that exceeds 4% on larger transactions?
There are cards that do that - e.g. some of the merchants have store cards that give you immediate discount - e.g. I have one that makes 5% off anything I buy in a particular big store chain.
I guess for airlines it is worth it even more since airline tickets cost hundreds of dollars, so if they can avoid paying couple of percents of each transaction to intermediaries by having their own card brand that adds up to serious money, and since they control points program they can give out points so that it's still profitable to them.
At least for Airlines it seems to be more about status than the flights.
Having a premium membership on United for example lets you use expedited lines for checking luggage, security and boarding. In addition you get free checked luggage, better customer support and are more likely to get upgraded to first class and are all around treated better by United.
If you're in a business with small-ish margins and your suppliers don't charge you extra for taking credit card, a cashback or other rewards card can actually measurably move the bottom line.
Well, yes and no. Indeed those fees do pay for cash-back and airline points and such, but most benefits-style cards have significantly higher fees than the standard 2-3%. For instance, my research last year showed that my AAdvantage Citi card was closer to 5% in total fees to the merchant. This is what is called a non-qualified rate. You can read more about it here:
I'd be surprised to hear they're operating at a loss in terms of the fees alone. Most of us are used to seeing fees quoted by PayPal, Stripe, Amazon and other processors for internet transactions. Card-not-present interchange fees are higher than card-present fees because of the higher risk. Square should be getting much better rates from their processors since they're handling in-person transactions.
That's just the news I was hearing from people who have seen their financials.
Let's say they aren't operating at a loss though. The processor typically receives 25-50 basis points on a transaction (0.25-0.5%). Let's assume Square is receiving 0.5% and generating revenue from their transactions.
At $5B/year in processing volume, that means that Square's revenue is 0.005 * $5B = $25,000,000.
$25,000,000 in revenue for a company worth $1B+? That's an extremely high valuation (40x revenue or more). And that's before figuring in all of Square's costs.
Basically, all of the people who look at the numbers don't see how Square will actually become a highly profitable company in the near future.
I have no insight into Square's management or financials, but if I were Jack Dorsey, I would find it reasonable to operate at a moderate loss for a fair amount of time, before launching my own exchange system that bypasses cards completely.
Indeed, that seems to be the way they're going, what with _Pay with Square_ allowing for contactless, mobile-based payments.
First they disrupt card processing for small merchants with low transaction rates that just murder traditional merchant account fees. Next, they get themselves involved on the consumer side of the transaction, abstracting away the physical card. What's next? Why not do away with the card entirely?
How about _Pay with Square_ prepaid accounts? Allow users to fund their accounts via store-bought gift cards, or Dwolla, or perhaps even go crazy and accept Bitcoin. If they do that, then Square could give that 2.5% transaction fee back to the consumer, and profit from the interest on the float.
I agree that may have been a good strategy (and may have been their original strategy) but with $100m in cash from VISA, it's very unlikely they will launch a competing network.
Also, all of Square's payments including digital ones still get processed over VISA/MC/AMEX and still have interchange. Getting rid of the card itself does no good to lower fees.
Prepaid accounts would definitely work though. Again, Square probably isn't interested (and may be prohibited) from competing with VISA/MC though.
Excellent analysis. Agreed that valuing Square as a credit card processor makes for a very frothy, perhaps unjustifiable, valuation.
My belief, however, is that some investors are betting on Square's potential as much more than a credit card processor -- really, more of a data and payments platform. If Square can own the marketshare of payment transactions happening offline, then other monetization opportunities appear and the credit card processing is more of a loss leader or infrastructure investment (e.g., Amazon investing in warehouses and supply chain management).
Some of the other opportunities include: coupons (they know exactly what you buy and can tailor deals); analytics (e.g., household good purchases dropped by 25% in San Francisco last month); recommendation engine (I ate at these restaurants last month, this week Square recommends these); and a replacement network for credit cards, though this seems unlikely in the near term because of the difficulty factor and the fact some big banks are investors in Square.
While there are assuredly other ideas, and while some of these may never yield profits, the macro point is that investors are betting that Square can monetize payments data and payment identity in new ways -- if it can become the new funnel through which everyone pays businesses in the offline world.
"figure out how to create an interchange free system"
In my view, this is the potential of bitcoin...an open platform for payments that doesn't require trusted third parties. I don't think a single company (or even country) could pull it off, but a new open protocol (like SMTP but for payments) that runs on the internet could do it.
2-3% is over-estimating things. Online retailers pay that much, anybody charging credit cards at a physical location should be paying more like 1.75% in fees.
I take credit cards at a physical location for a physical product, and think I have good rates. We do $10-$20K per month, and averaged across all cards and including all fees we pay about 2.6%. I've checked with FeeFighters and others, and have never seen a legitimate quote as low as you suggest. I don't know if the savings are enough to cause us to switch (we use Square as a backup), but I think that for certain merchants this new offer is the best rate around. If you speak from experience and are currently paying less than 2% total fees in the US by some other means, please tell me how you are doing it!
I'm not currently paying less than 2.6%, because i deal exclusively with online transactions. All i know is that most of my clients who handle offline transactions through another provider are shocked at paying over 2% when they start collecting money online.
and my experience is in Canada, not the US, but in general our rates are slightly worse here. Your rates might be high because your volume is pretty low.
Perhaps Canada actually has better rates than the US, but my general experience has been that people who say they are paying less than 2% aren't actually looking closely at their bill. My guess is that your clients are wrong, and are quoting the best-case advertised rate they signed up for, rather then the actual all-included cost they pay. But maybe they could get that low if their average transaction is high enough and they are in an extremely safe industry?
because when you go up and up the ladder, eventually you end up with 5-6 huge companies that control everything...not too surprising when the companies end up with similar pricing.
I mean take credit cards for example. You have Visa and Mastercard with the majority of the market. Then you have American Express and Discover that have a tiny portion.
That's it. And that's more or less worldwide.
You'd think since the coming of the internet, we'd have at least some competition in this space. Just imagine how much money there is, in join Mastercard/Visa as a top 3 credit card.
Square is a little lower down the chain, so the main thing they are giving here is passing through their huge savings down the pipeline. But even then it's not 100%.
Their basic pricing is 2.75%. So essentially you need to sell $10,000 worth of stuff before you start profiting off the $275/mo...and you only have until $20,000 before you go up to the regular 2.75% pricing.
And 2.75% is pretty high...for credit card processing.
There are virtually no fixed costs to actually performing the transactions. The fees are levied by the not-so-competitive Visa/Mastercard/AMEX trio that would love to keep their fees artificially high.
They have to pay for infrastructure, they have to pay for customer support, they have to pay for fraudulent transactions and on and on. I think most credit card companies have something like 10%-15% ROI
Their fraud costs are not what you make them seem. The credit card companies do not take on the risk for fraud most of the time. They push that risk onto the merchants.
This is why large e-commerce companies have giant fraud departments trying to prevent fraudulent orders and charges on their site; because when they occur, they generally just eat the loss.
Actually the merchant is only liable for the loss if they did not follow all of the rules and regulations for processing the credit card.
From wikipedia (http://en.wikipedia.org/wiki/Credit_card_fraud#Merchants):
"The liability for the fraud is determined by the details of the transaction. If the merchant retrieved all the necessary pieces of information and followed all of the rules and regulations the financial institution would bear the liability for the fraud. If the merchant did not get all of the necessary information they would be required to return the funds to the financial institution. This is all determined through the credit card processory."
From what I have seen, it is very common for the merchant to be liable for losses on a card not present transaction (e.g. online retail) but the credit card company stomaches the losses for a card present transaction.
I suspect that online merchants could reduce their liability by implementing things like Verified by Visa but choose not to because it causes them to lose too many legitimate sales.
The networks get very little (IIRC a small flat fee per transaction on the order of 5 to 10 cents, but I don't have our pricing in front of me and it's some of the most opaque pricing you'll ever see) - most of interchange goes to the issuing bank.
Blame the banks issuing credit cards for the high rates, not Visa and MC (both AmEx and Discover are, effectively, their own issuing banks - so go ahead and give them their fair share of the blame)
Sorry, no. Fees are paid to the issuing bank, acquiring bank, and network. The majority of it goes to the issuing bank, and that's the non-negotiable rate when you get a merchant account. That fee is known as the interchange fee. The processing fee is something you negotiate with your gateway and/or acquiring bank.
It's great to know that you work in the industry, but it's irrelevant; argumentum ad verecundiam is a logical fallacy and only serves to demean your argument.
To address your point, I understand interchange as being set and collected by the card network, and is non-negotiable. Anything off the top is left for the banks to keep for themselves, e.g. the plus in "interchange plus" pricing). Another example assume a hypothetical interchange of 1.5% and a merchant that has a merchant account that costs 3.5% + 30¢ (gateway) per transaction. In this case the card network takes 1.5%, the gateway 30¢, and the banks 2%. Is this not how it works? It would be nice if you could cite something (not trying to be an ass in case it reads that way :).
2) Much of it goes to the credit card interchanges (Visa / MC / Amex / Discover). Those are the folks that end up with the bulk of all these fees. Processors are middle-men that make a surcharge on those rates. Many "traditional" merchants offer interchange-plus rates now.
As for 1), the emergence of mobile devices have really enabled this to happen. Square is really useful in the mobile environment. Prior to that, it was Internet merchants and traditional POS systems.
> "we’ll bill you $275 on the first of each month. Change pricing plans at anytime from Square Dashboard."
So no commitment. If your volume drops too low, seems you can just drop back to their usual rates. And since their "overage" rate is just the standard rate, there's no reason not to do it if your volume's higher than their cap ($250K/yr, max $400/swipe).
Maximum savings for a business is capped at $3,575/yr and if they sell less than $120k/yr, businesses will actually be losing money.
It sounds more like a safe customer acquisition strategy for Square (with acquisition cost maxed at that value) then a huge savings for small businesses (min swipe cost would be at 1.32% compared to 2.75%).
Through the use of elementary arithmetic, Square is charging every company the average expected transaction fees for the month, regardless of whether the actual transaction fees would be higher or lower than this. So half the companies save money while the other half lose money.
This is being spun as an innovation when, in reality, it's likely to net Square more revenue as there are probably more merchants between $0 - $10K than there are $10K - $21K.
No they're not. They're only charging companies that sign up for this fee structure. Anyone who signs up for this when they're not making $10k is bad at math.
Most people who sign up for a fixed monthly fee gym membership are bad at math rather than paying a smaller drop-in fee. It makes for good revenue for the gym though. And for those who workout a lot, it is a good deal.
Not sure what traditional payment terminals charge, but presumably when you start doing large volume they bring the cost down. There is going to be a point where square's flat 2.75 between 0-10k/month and 21k/month-infinity is more expensive than a bank terminal (which I'm sure fall to >1.5% at high enough volume).
Is it illegal to chop up payments that exceed $400? If not, I'd say this is a nice way to save a bit of money if you do more than $10,000 in business every month. Not sure if it's worth the hassle to implement though.
If a merchant does at least $13,000 per month in credit card revenue, this is a good deal (read on for assumptions).
Quick and dirty math here: Stripe charges $275 per month for card revenues up to $21,000 per month. I took a look at http://truecostofcredit.com (courtesy of FeeFighters) and the merchant fees per transaction vary widely based on the type of merchant as well as card type. For the sake of argument, let's say the average Visa/MC transactions costs the merchant 1.75%. And let's say that the average AmEx transaction costs the merchant 3.5%. Now let's assume it's an 80%/20% distribution between MC/Visa and AmEx transactions, respectively, bringing a blended rate of 2.1%. Assuming that the merchant is charged 2.1% per transaction by their credit card company, the tipping point is $13,095 of revenue per month. Anything above and beyond that and this is a good deal. Below it, it's not (aside from the fact that's a fixed cost versus a variable one which is worth something).
If the only thing you're selecting your merchant processor on is a couple of basis points, you're going to end up screwing yourself over regardless. You'll never get the real cost of processing out of a traditional merchant processor regardless - in fact, you really can't unless you know the cards* you'll be charging ahead of time. There's a lot more that also matters, like time to receive funds, reserves, chargeback costs, handling, and dispute resolution, gateway fees, breakdown of authorization versus capture costs... the list goes way on.
* Unless you're doing billions of CC volume per year, in which case that turns into real money.
Not all Visa cards are created equal. Different Visas cost different amounts to process, based on a huge number of factors. Debit/Credit/Charge, Intl/Domestic, Business/Personal, Prepaid, numerous sub-categories, etc.
That's a very narrow window of value. If < $10k means you're better off going with the per-transaction rate, >10k but less than $13,095 means you're better off with a regular merchant account and > $13,095 but less than $21k means you're better off with the flat rate, then how many firms would really benefit from this?
Looks like they should say "if you're doing more than $10k (or $13k if you want to bring in the competition), but less than $21k, take this deal". But of course, no one would take it.
Square has value beyond their rate. They also have an interesting/evolving point-of-sale iPad app, and a groundbreaking wallet app. These could help grow business beyond the shavings of a percent that you'd save playing the processor numbers.
And there's value in a simple rate, too. Yes maybe you could run the numbers and find some scenarios where you'd save elsewhere, but it's a very confusing and somewhat deceptive landscape, and if you get it wrong you might actually end up paying more. There's value in knowing that you're going to get a pretty fair and understandable rate up to at least $250K/yr of revenue.
I don't know about Square's terms, but I've always been told by merchant account providers that charging your own card is one of those things that will get your account terminated immediately if they become aware of it.
You might get away with it longer doing that, but the repercussions should you be caught wouldn't be lessened any by using an LLC.
The real risk you're taking when abusing a merchant account is being added to the TMF (Terminated Merchant File) and MATCH (Member Alert to Control High-Risk Merchants) lists. These are essentially blacklists for the payment card industry that all acquiring banks and processors check new applications against.
The reason the risk is not lessened is that when a merchant is added to these lists, both the company and all the company's principals' names and social security numbers are added. The list of a company's principals is something merchant account providers ask for on new account applications for this reason.
Basically, if you do something so egregious as to be added to these lists, you'll never be able to have an ownership stake in any business accepting credit cards for the rest of your life. The only way to get approved in the future would be to commit a new act of fraud to avoid the new acquirer from knowing a blacklisted person is a principal of the new company.
I don't know about you, but for any kind of entrepreneur, the prospect of a lifelong ban like that would be pretty terrifying.
In this case, who makes up the difference? I would assume that it would be on Square's end to make up the 2%-1.32% difference, so it's likely that Square would be the one to terminate your account.
However, I do wonder what kind of perks you get from a credit card company if you could spend $250k/year with them.
My card limits my cash back to something like $300 dollars per year. If there is a card that lets you get close to $5000 dollars cash back a year, I'd LOVE to hear about it.
Considering the webapp itself doesn't function with JavaScript disabled, that sounds like a feature instead of a bug. It keeps people that will never be their customers out and away from their support queue.
I clicked on a news announcement for a product that I currently know very little about and this will be my first engagement with ANYTHING they have published. Would their impression on me be better if I get a giant white screen, or if I get a note saying that their page requires javascript?
Regardless of my engagement with the product, it is certainly a bad assumption to say that everyone blocking javascript is not a potential customer.
This is revolutionary because it is the first time that merchants have been ever been given the option to pay a flat fee per month in lieu of paying a percentage fee on each transaction. While that may not seem like a big deal you, merchants really love the simplicity of it.
A business that processes 60K a year is below the size that is targeted by this pricing structure. They are better off continuing to pay 2.75% per transaction.
Yes but if your small business only does $60k in CC transactions it's likely on its last legs to begin with. You would need more to cover your expenses also...unless your business is very cash-heavy. At $200k in transactions that $3300 yearly fee is 1.65% which is a lot lower than what most retailers are getting (which is in the area of 3% to my understanding).
Last legs, or first legs .. it's a matter of opinion ;-)
I just get the feeling square are offering a similar deal to a lot of other payment gateways, but packaging the deal differently - i.e. they're not really being that disruptive.
Coming back from Portland and pleasantly surprised at the number of cabs using Square. Not an expert in the world of taxi companies, but at first glance the monthly pricing seems like a potential match for them.
Let's do the math, here:
"for small businesses processing up to
$250,000 per year". So, the most you're processing is a quarter million/year, and you're paying 275/month = 3300 per year. $3300/$250000 means you're paying an effective processing fee of 1.32%. That's a big savings over their usual 2.75%, but it's still probably more than the big players are paying. And that's assuming that you use it for optimal efficiency.
The breakeven point is ($3300 / .0275) = $120,000, which is reasonable, all things considered - I know a couple of small shops that do ~$200,000/year of business. I know a friend stated that his breakeven point for his small shop was $400 in sales a day, and that he was living well on ~$600. It would probably be advantageous for him to move entirely to Square, based on those numbers.
Square is really opening the door for credit processing in a lot of places that it wasn't practical before. I just went to a "Food Truck Friday" event at a local park and every single food truck was accepting credit cards via Square.
You're being naive. Read the fine print on Intuit's offer. Their rate only applies to "qualified" transactions. Rewards cards, among others, aren't "qualified."
I honestly wish they had some kind of affiliate program. I'd make so much money pimping Square out to local businesses, especially the ones I truly care about. I am so sick of being told: "Sorry, we don't accept AMEX" or simply "Sorry, we don't accept credit cards." Are you kidding? It is 2012!
A business doing $250k in annual business most likely has their own point of sale system. The 1.3% cost would be more attractive if there was an API that businesses could then just integrate into the existing POS system.
Ahh upon further investigation I discovered that the catch is that businesses wishing to do over $21K in sales per month are ineligible.
So the product is only for businesses who meet all three of the following criteria:
1) small enough to not need over $21K per month of credit card charges
2) low enough chargeback risk that Square accepts/keeps them as a client
3) are currently paying more than $275 in fees per month with their current provider.
So bottom line this is a great marketing pitch but not really useful to the vast majority of companies in the real world. The odds of #2 and #3 both being true are basically nil for businesses small enough to meet #1.
Your initial reading is incorrect. Past 250,000/yr, you go back to the normal 2.75% rate; you remain eligible up to that point, and that point is not determined monthly but annually.
That sounds pretty awesome at first but I guess it would require some math to figure out if you really are saving much compared to normal CC processing.
Square is placing a big bet on the numbers working out in the long run. If their analysis is just a little bit wrong, they're going to burn through millions of dollars in losses.
Why? Because the 1.3% "sweet spot" is almost certainly well below their cost. "Interchange" is the wholesale rate that processors like Square pay to card networks. Visa & Mastercard publish their rates and as far as anyone knows they're not negotiable. According to FeeFighters which did a lot of public research around rates, the average interchange rate for a typical card mix is:
1.58% + $0.13 per transaction
Unless they've figured out a way around standard interchange, this is Square's approximate cost.
Remix that into a 2.75% flat rate and you'll find that Square already charges less than that cost for purchases below ~$6 (even considering that there's a special, lower small ticket interchange rate). And now for businesses that hit the sweet spot around $17-21K/month, Square's probably also taking a loss.
No doubt Square is betting on a mix of merchants that fall in the profitable peaks between those troughs. All in the name of simplicity.
Sources: http://feefighters.com/square-calculator http://usa.visa.com/merchants/operations/interchange_rates.h...