Hacker News Reader

Comment by heydenberk | Hacker News Reader

Is anyone willing to give a contrarian take? I'll give it a shot: Square is an ambitious company with some great engineers, stellar UX and a giant total addressable market. Their business loans are interesting and could grow into something important. Square readers are a fashion accessory for hip businesses. No sooner would a coffee shop be seen without a Square reader and an Edison bulb than its yuppie hipsters patrons would be seen without a MacBook or an iPhone. That brand equity might really be worth something.

View on HN

Coffee shops like Square because it offers one of the lowest rates for tiny under $10 purchases, not because it's "hip". It's a flat 2.75% without any additional $0.10-0.30 fee like some other processors. So a $4 coffee costs the merchant just 11 cents to charge.

Unfortunately this is because Square actually loses money on these sales, which you can confirm by looking at the public available interchange rates for Visa/MC.[1] Credit transactions start at around $0.11-12, and debit is a whopping $0.22.

There's other reasons too like maybe they find their bundled software easy to use or their signup process has less hassles, but they are practical reasons.

[1] https://usa.visa.com/dam/VCOM/download/merchants/visa-usa-in...

Square does high enough volume to negotiate better rates than you'd expect.

Maybe on credit cards. Probably not on low value debit card transactions, specifically the fixed fee.

The size and strength of our payments and POS business have allowed us to develop a deep understanding of our sellers’ business performance and to build a cohesive commerce ecosystem. As such, we are well positioned to provide financial services and marketing services to sellers efficiently and intelligently. For example, one of our financial services, Square Capital, uses our deep understanding of our sellers’ businesses to proactively underwrite and extend cash advances to them. Although Square Capital is still in its early stages, we have already advanced over $225 million since launching it in May 2014. Square Capital demonstrates how our services can rapidly reach significant scale through a combination of strong demand and our direct, ongoing interactions with our sellers. Although Square Capital currently does not contribute a significant amount of revenue to our business relative to our payments and POS services, our software and data product revenue, including revenue derived from Square Capital, has grown quickly, and we expect these products will contribute a larger portion of our total revenue over time. Marketing services, such as Square Customer Engagement, give sellers easy-to-use tools to help them close the loop between communication with a buyer and ultimately a new sale. We currently see more than 1.5 million monthly feedback communications sent by buyers to sellers through digital receipts. Together, our financial services and marketing services provide sellers with access to capital and access to customers, making it easier for them to accomplish their goals. [0]

Transaction fees is a loss leader, but this isn't their business model. They'll make a majority of their profits on small business loans.

Example:

Local burger shop - I need a $10,000 loan to buy a new stove.

Square - Based on your commercial transaction history, we see you'll be able to pay the loan off in exactly 17.2 months. We'll give you $10,000 at $foo APR for 17.2 months.

[0] - Square S-1 https://www.sec.gov/Archives/edgar/data/1512673/000119312515...

Oh my... merchant account advance loans are the "payday loans" of the small-business world. Much like the 'payday loan' business, the rates usually end up being usurious, but if you are cool with that, there's certainly money to be made.

But... that's completely not what I thought square was doing.

True, but this type of loan has been around a long time in the payments world. These are loans of last resort and the other processors haven't been able to make them into multi-billion dollar businesses so I'm a little skeptical that Square can do it.

Your source, or is this pure speculation? Even Walmart can't negotiate Visa/MC interchange fees.[1] And they do ~400X Square's volume. It's not just a matter of merchant/processor size. Once enough consumers have adopted it as their primary/only card, the card network has an extremely strong position. (This is why AmEx rates are more negotiable; it's usually an alternate card.)

[1] They do lawsuits instead. http://www.reuters.com/article/2014/03/27/us-walmart-visa-la...

That lawsuit isn't about lowering the transaction rate, it's about collusion between credit companies to keep their rates in line with each other.

First hand, I've seen a small ecommerce shop have rates lowered a 1/4 percent doing less than $1m/y.

Second hand, Costco, who in the US and Canada just switch from AmEx to Visa as their accepted card, went through long negotiations that resulted in booting Amex for not matching the discounted rates Visa was willing to offer.

No sooner would a coffee shop be seen without a Square reader and an Edison bulb

I'm not so sure about that. I'd agree that they all have "fancy" (for want of a better word) payment systems, but I don't think there's a reason they have to be the fancy ones made by Square.

But more importantly: the US is (finally) moving to chipped and tap-to-pay transactions. That means that pretty much all merchant hardware is going to need to be replaced over time, so the market the Square (and everyone else) currently has is up for grabs. If I were looking at investing in Square that would make me nervous.

I have a quick question about this - there is exactly one business in my area that has actually switched over to chipped cards, and that's Home Depot. Everyone else goes "lol we don't do that, use the magnetic swipe like a normal person" when I try it. I thought that the adoption date was in October, and seeing as how everyone has the machines already... what the hell is going on?

Merchants can continue to accept mag stripe transactions but they do so at their own risk. Failing to switch to EMV by the switchover date in October means that any fraud that occurs via a non-EMV transaction is now the merchant's liability. Instead of credit card companies and banks eating the losses from fraud, the individual merchant eats it now.

There's an interesting set of incentives at play. The October deadline was actually a shift in liability - now businesses still using swipe transactions will become liable for any losses due to fraudulent transactions, while the card companies will continue to be liable for chipped ones.

Beyond that I don't know too much - maybe the price of the hardware is such that it makes sense to risk it for a little while before buying a chip-capable machine (do people lease them?). The part I really don't understand is that there are businesses with chipped terminals that still insist on you swiping, I can't work out why they'd want that at all.

C&P seems noticeably slower than magnetic stripe at the moment. Possibly due to stores still running their POS on PSTN connections. I wouldn't be surprised if some places were still using stripes to avoid slowdowns at checkout.

Liability was to switchover from the issuer to the merchants' processors (banks) in October, so that was the big push, to off-set liabilities. My experience is about 25% require Chip and PIN.

Some consumers are registering complaints about slow lines due to C&P[1] most of it due to longer C&P processing time.

[1]http://security.itbusinessnet.com/article/One-in-Five-Consum...

I was just at a coffeeshop today in SF that had a chip reader and it seemed to be plugged into a Square register.

Square has had chip readers for a little while now and they are pretty cheap too --> https://squareup.com/shop/reader . One of my favorite bars is already using it. Why would someone switch away from square if they are happy with it and there is a cheap upgrade path to support chip readers? Switching services potentially costs time...I can't imagine people wanting to spend that time unless they were inherently unhappy with square.

Square has a habit of wasting a bunch of energy on bad ideas: half the company worked on Square Wallet, which was a dead-end. Half the company worked on the Starbucks integration, which is now known to be a money pit.

I sort of think this means that they're undervalued. All they have to do is stop throwing time and money away and they'll be a lot more productive and profitable.

Don't forget the Etsy clone, Square Market.

I sort of agree. Clearly they have some good technical folks. But based on the numbers and the Starbucks deal their management appear to have limited experience in strategy and how to build business cases. So even though the "team" on paper might be good they haven't been able to prove themselves yet.

This isn't helped by having a founder who seems to split his time equally with another large and basically unproven business (Twitter) when you are looking from a financial perspective.

My read on the situation is that the private equity funding options are all exhausted and the company's last option is to IPO otherwise they are a dead duck. That's not a very compelling sales pitch.

I'll bet the share price falls a lot further once they are listed. Perhaps at that time it will present a good buying opportunity if one wants to speculate on the team coming up with the next big thing, but that will be a race against the clock before their bank account runs dry.

That's a great example. For contra-contrarian reasons: If your coffee is less than $7.75 (debit card) or $4.00 (credit card), square loses money (cf Starbucks).

Their contract with Starbucks is ending soon. Going forward their reader fees will be profitable to the company.

Not always. There is a minimum ticket price that must be met for Square to make money. Square charges merchants a fixed percentage, but Square's costs aren't so simple. There is a reason why tiny corner stores charge extra to process a credit card transaction under $10. or so.

It's not just Starbucks. He did those calculations based on the interchange fees Square pays to Visa/MasterCard/AmEx compared to the flat 2.75% it charges merchants.

To swipe a debit card, Square has to pay at least $0.21 + 0.05% per transaction. 2.75% of any amount less than $7.75 doesn't cover the $0.21 fixed cost. They lose money.

Same deal with credit except it's $0.10+ (and 1-3.5%) instead, so they're only losing money on every swipe under $4.

There's also some amount of markup over interchange going to their underwriting banks (JP Morgan Chase and Wells Fargo) which makes the minimum charges at which there's any profit even a bit higher than that.

Basically, coffee shops are loss leaders for Square.

This is a non-issue. Square has 30-35% margins on its core processing business which is exceptional. The 2.75% rate with no fixed portion was a smart way to attack its core market of small business, low value transactions.

Are people really going to care if their joint of choice changes payment providers?

Do people care how cool their bank and credit card company is?

Id almost certainly guess not.

The biggest change I can think of from a consumer perspective is the move to tap payments.

Hmmm interesting.... I have had in depth conversations about this, and I strongly feel that you are missing something. Sure, in certain areas having a ipad/square reader combo is not necessary. It may actually be detrimental I would imagine. I am not talking about some random small town in Missouri, I am talking about less trendy districts of a city or a coffee shop with a more old school vibe. BUT in large cities and metropolitan areas having a square reader instantly makes your company more trendy and part of an in crowd. This trend will continue to disseminate outward... not with the square reader necessarily, but with some new point of sale system. But already square is at the for front of this movement, we wont continue to use these old POS systems forever. Change will occur.

Cut me a break. As a customer, I want to buy something and pay for it as easily as possible. If a taxi driver wants me to pay by Square because that makes them more money, I'm cool with that so long as it's straightforward. Whatever. But I absolutely have zero interest in how "cool" a given payment system is.

I disagree - I live/work smack in the middle of Manhattan and I'm not really seeing a Square dominance in coffee shops around me.

Yes, every coffee shop needs their cool iPad credit card processing machine, but anecdotally I'm seeing more non-Square ones than Square ones.

The choice here isn't between "usable iPad thing made by Square" vs. "crappy 90s POS terminal", it's "usable iPad thing made by Square" vs. "other usable iPad thing made not by Square".

I think a huge issue here is that merchants care about the bottom line, and it turns out Square does not have a lock on producing reasonable hardware/software around payment processing. Square may have invented the category but from where I stand they don't look like they own it.

You're lucky if they take cards at all in Manhattan, half the stores are cash only.

in San Francisco, I'm starting to see post-Square registers crop up. For example, Revel ( https://revelsystems.com/ ) is also iPad-based.

> Do people care how cool their bank and credit card company is?

The company I work for has built a business based on applying this predicate, and so far we have been successful.

The company being Simple?

Yep. Not the only value that defines us, but definitely a differentiator.

Oh, Square definitely could grow out of its current malaise. I think its biggest problem has been a lack of focus on payments. It basically ceded online payments to Stripe when pretty much all of its merchants need it. It has been extremely slow expanding internationally and bringing out an chip/ApplePay terminal. Instead it has been expanding into various mediocre businesses like scheduling, payroll, food delivery. I'd reluctantly let it keep going on lending since that's hot right now but I don't like it as a core part of its payments business.

I think Jack is capable of leading both companies but I don't think the part-time roles are helping the stock price of either at the moment.

>Square readers are a fashion accessory for hip businesses

Disagree. This is not a consumer electronics market, its a business market.

I have an contrarian view as to why Square seems like a company poised to grow.

All that customers and shopowners care about is simplicity of payment. Square has got that spot on and has pretty good market share which will only grow.

Only tow things can hurt them

1. Existing device that works as card reader. Think of iPhone that can accept payments. 2. Some kind of government regulation.

I dont see that happening. Even Apple's pay p2p thing wont be a threat simply because it probably wont accept a physical card. [Correct me if I am wrong].

A quick survey of the SOMA neighborhood cafes in SF suggests that about half are using some other competitor. The most popular one I see is called Reveal, I think. Your analysis relies too much on cycnicism, IMO.

Erm, nope. So nope. I see how many transactions the lemonade stand on the beach right below my balcony does on Square -- it's an awful lot. Runners, bikers do not need to carry cash just a card. I went with a friend to Burnaby Mountain and between the two of us we would've had problems to buy ice cream from a truck showing up for the three of us for cash but he had Square. It's not "hipsters" it's another nail in the coffin of cash. I hate cash. (And no, I do not have a Macbook or an iPhone, I am a stout believer that Apple should be boycotted for being the leader on the "sanctioned apps only" road)

Not sure where you're living, but I lived in Rochester, NY and just outside Pittsburgh, PA the last two years. The last time I saw a square reader was when I lived in Manhattan, 3 years ago. I'm not sure if I'm just not frequenting the types of places that would use square readers, or if where they're popular is isolated geographically.

I've always used them at Rage Salon, Campbell, CA.

If you're worried about Apple screening the apps you can buy on your phone maybe you should check out what Square doesn't want you to buy:

https://squareup.com/help/us/en/article/5089-prohibited-good...

Those are things Square doesn't want merchants to sell. The difference is meaningful here, because many of those services are regulated and the goods listed are prevented from sale across state lines. Square has an MSB license in all 50 states and are under scrutiny from federal regulators, so they have to abide by the rules.

Have you ever read any merchant account agreement? There are always a whole host of things you're not allowed to sell because it puts you in a different risk category. There are other processors who specialize in being able to handle higher risk categories (say, adult content).

Reply on news.ycombinator.com