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> charges stores less than what Visa charges

Their flat rate of 2.75% is substantially more than what Visa charges for "card present" transactions. The highest cost cards are 2.4% but they're going to be a small portion of most stores' card mix. I'd think most shops cost Square 1.1-1.5% across all their transactions. Debit volume exceeds credit volume in the US -- most people are swiping their bank check cards, not commercial purchasing cards and the highest end reward cards that require pristine credit -- and the Durbin amendment capped the interchange fee on debit cards (when swiped a-la-Square Reader) at 0.05%+$0.21 per transaction. That means 2.75% is 98% profit for Square on a big debit card swipe.

https://usa.visa.com/dam/VCOM/download/merchants/Visa-USA-In...

The only place Square's subsidizing the transaction fees is on very small purchases where the flat ~$0.15 of the interchange fee amounts to more than 1-2% of the total transaction, and with AmEx where, if Square hasn't negotiated better than sticker rate, they could be paying 2.85-3.5% depending on business type.

If they're losing money on the one thing they charge money for, what's the business? And how are their competitors doing it? PayPal's historically offered merchants with volume as low as 1.9%. They offer 2.7% flat rate (no per-transaction flat fee either) for their swiper.

On a percentage basis that's true, but if the transaction is small, such as a $3 coffee, then the actual debit fee is (($3 x 0.05%) + $0.21) ~= $0.22, but Square would only charge $0.0825 in fees. I suspect those losses add up at the transaction volume that Square sees.

paypal got onto our website by offering 2.3%, matched our CC fees.. received an email about a month ago [1] to 2.9% thinking about removing them - I am frustrated.

[1]http://www.ecommercebytes.com/cab/abn/y15/m08/i28/s01

Whilst interchange is indeed the largest part of processing costs, there are still assessments (0.13%) and brand fees (FANF, cross border fees (1.25% for Visa), etc) that increase the cost of processing over interchange.

Square can only hope to make a decent margin on its 2.75% pricing by 1. seeing a preferred distribution mix on card types (such as, high debit card usage; less Amex; less expensive rewards cards; high cards qualifying at card present rates & no downgrades) and/or 2. special interchange discounts with the networks based on growth initiatives and/or fraud tools.

If they can't generate enough $$ from processing revenue, they'll need to use card processing as a loss leader for other services (loans, analytics, marketing)...

In Ashlee Vance's "Elon Musk" book, Elon discusses this very issue with Square drawing on his own experiences with PayPal. Elon states that the notion of controlling both sides of the transaction, or better put, how to avoid the end user from withdrawing from their digital bank account is what he criticizes most about Square. He believes that, like PayPal, they have to create new ways for users to be able to utilize the money Square is holding onto for them by either creating businesses around say a Square-owned debit cards (ala PayPal debit card), extending the payment capabilities to partners, and essentially, just finding ways to keep the transactions within their network is what is going to practically eliminate most of their costs.

I'm about a third through the book. I like a lot of the content but I do not like how Vance ties most things to Musk's ego - even when they are hardly related and seemingly would have barely crossed Musk's mind at the time. He often seems to intentionally paint a darker picture where the facts don't warrant it.

Probably false. It has been reported that gross margins on Square transaction processing are around 30% which is believable at its 2.75% fee.

I keep waiting for Square and Dwolla to merge in some form as that seems like a great way for Square to start cutting out the credit card companies.

I know Dwolla's FiSync protocol is being adopted by more banks and is zero-cost, but for Square to provide the consumer coverage most merchants expect they would have to wait for FiSync to get to a much larger scale.

How would Dwolla help Square cut out the CC companies?

I think FiSync and Square both benefit from a vertical merger (I'm considering then to be in separate market spaces rather than competitors; which certainly could be debated). Both get a near term benefit of the expanded customer base which should help them expand. FiSync would benefit Square as would Dwolla Credit as a credit card alternative

Credit cards won't be immediately replaced as they are accepted virtually everywhere. I think Square could be positioned well to replace credit cards though using the old Microsoft model of embrace, extend, extinguish.

Embrace credit cards in the short game. Extend with direct payments (bank to bank and alternative line of revolving credit). Extinguish; pull the plug on the credit card companies once they achieve high enough rate of adoption.

Dwolla is nothing more than a fancy front-end on top of a credit union in Iowa. I tried to use it for my business back in 2011, but it was just too slow -- takes 2 weeks for money to get in (1 week transfer from their bank account to Veridian and 1 week from Veridian to your bank account) and 2 weeks for money to get out (same in the other direction). Very disappointing.

Harassed as many people as I could for information on FiSync so I could try to offer integration to local credit unions and banks and couldn't get any real information out of them on it; it was a phantom program back when I was looking.

its a bit different these days.

Dwolla is an extraordinarily unscrupulous business.

They marketed their service for years as 'free from chargebacks' and then (without notice!) silently deleted transactions which had, in fact, been charged back: http://venturebeat.com/2012/03/07/tradehill-sues-suing-dwoll...