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Comment by ng12 | Hacker News Reader

How does Square make money? Credit card processing itself is a tight, low-margin business. Verifone is only worth a couple $B for that reason.

Does Square make that much money off services?

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"Square has taken aim at the much larger goal of providing a tech-savvy alternative to the big banks, expanding out from payments to lending and online deposits."

Note also that Square is not actively losing hundreds of millions of dollars a year, which is a point in favor of its value.

But Square's been "taking aim" at new markets for years: remember their Google Wallet competitor? Or what about Square Cash? I also remember them launching tons of new services (e.g. appointment scheduling) a few years ago, is there still momentum there?

Square's had a firm hold on hip small businesses for half a decade, I'm still not convinced they can use that as leverage to build profitable services.

These points are addressed clearly and interestingly in TFA.

Square Cash is currently #38 on the chart for top free apps in Apple's app store. No other financial apps above it. Might be good momentum with that product at least.

I'm curious what that actually means in real download numbers now. Remember in iOS 11, iOS games were split out into a seperate top chart, which I imagine means waaaaaaaaaaay less downloads are now needed to break the App Store's top 200 ranking for all other app types. Worth bearing in mind if using this as evidence of momentum.

I wonder if that momentum will last when Apple Pay Cash rolls out next month - why install a third party app to send money to friends when you can do it via iMessage?

'Venmo' itself has become a verb rather than just a service so I doubt either of them have the necessary momentum to take these services to anything more than nominal levels of volume relative to the market lead

What's a Venmo?

https://www.clickondetroit.com/consumer/how-venmo-became-a-v...

> "Venmo has essentially eliminated the use of checks for our generation"

I've literally never heard of Venmo before now

Me neither. I googled it, out of curiosity myself. I was confusing it with BevMo, a retail chain for beverages et al.

My gut feeling is that whether you are familiar with the popular cash sharing apps really depends on your social circle. Among young people/students etc, not surprisingly I see a TON of Venmo users. Among adults with steady reasonable paying jobs, not so much. I've seen Venmo reguarly used as a Verb in social media too.

I know for me personally I'm far more likely to say "you get it next time" than bill my friends for some share of an outing. If it's sufficiently expensive that this doesn't make sense I'd just split the check. If I was younger and still a student I can absolutely see the appeal though.

Because some of them are green bubbles

Just wanted to note that Square Cash is also directly integrated into Snapchat and Facebook Messenger.

Zelle, the bank consortium competing against Square Cash (and Venmo), is built into most major bank apps now.

https://www.zellepay.com/partners

While I think Square has some momentum, I believe the financial services industry as a whole is going to overshadow their Cash offering.

Anecdote, but Cash is just as popular as Venmo among my friends/acquaintances/colleagues(mid-late 20s, pacific northwest). Everyone has both installed because you never know who's going to prefer which one or just happen to open that one first.

Venmo isn't obviously profitable either, last I read PayPal was still trying to sell it to B2B merchants. Seems like more of the same problem -- lots of momentum, little monetization.

Well, how do you monetize such a service without Google Wallet, Square Cash, and <insert new entrant of the week> eating you alive? Everybody is running away from Visa/Mastercard processing and toward ACH (Dwolla & Popmoney) or debit based systems (Google Wallet, Venmo), and any fees essentially force whatever volume you have to jump to a competitor.

Worst case, you'll see people using online bill pay to mail eachother's banks checks as that is free and low effort. People just don't want to pay to move money friend to friend, and the US is an anomaly with our extremely high credit card processing charges, where we're at 1.5% to 2% in interchange, the rest of the world is below 1%.

That's very interesting, among my social circle (low 20's Northeast New England Area) Venmo has an implicit monopoly on the service. I doubt any of my non-cs friends have even heard of Square's offering.

Venmo is definitely king in Seattle, but people really don't understand how risky Venmo is for Craigslist and Facebook transactions. Since its F2F, if the person who sent you money contacts Venmo, that money will be returned to them without the ability for the receiver to get a word in edgewise.

Really? I've tried to contact Venmo in the past about an errant send and they told me I was out of luck.

Contact your bank and reverse the debit transaction, like an errant check, you have rights when it comes to reversing a transaction. Most fraud is committed during the settlement period though, while Venmo holds the money: http://www.slate.com/articles/business/moneybox/2015/09/venm...

Some of the trendier merchents have Square in my neighborhood. I'm in NW Maine. I just bought some alpaca wool and the nice lady swiped my card through a Square device attached to her phone. The pie lady takes Square too. I think the new coffee shop, down in the village, now has a real merchant account, but they did use Square. I've never even seen Venmo.

Err... I'm old, but we have hip and trendy tourists?

Ah well... Another anecdote for ya.

I believe Venmo is squarely in the market of peer-to-peer money. IIRC I don't believe they have any business offerings.

Square, meanwhile, is offering both business and peer-to-peer options.

It might be a generational thing, but it does seem like Venmo has cornered the p2p market.

That would absolutely explain why I've never seen it. In my generation, if I invite people out, I expect to pay the bill. There is no bill splitting. If I'm paying someone, I've probably got cash.

Yeah, I even have a landline. I did mention I'm old. ;-)

They must be popular in pockets of people here and there, because I've never used either of them or seen them in the wild. I had to look up what Venmo was a week ago when someone mentioned it here. As far as I can tell, it's a "hipper" version of PayPal except it's not supported by web stores or anywhere else I might buy something. So cool I guess--I'm probably just an out of touch old fogey--I don't use Snapchat either.

Venmo - which in my experience is ubiquitous - is for sending money to and from friends and acquaintances (often for things like dinners, drinks, tickets etc), not for e-commerce (although my landlord takes venmo). Using PayPal would definitely be an 'old guy' tell.

I use Cash far more than I use Venmo these days. Like maybe 90% Cash 10% Venmo.

Every week I see more friends and local small businesses using Square Cash. Ever month I see more local shops using Square POS with the fancy iPad holders and readers, etc. The feature set for those of us who use it to send invoices continues to grow, too, making them really a great solution.

It's true that processing is low margin, but (1) you make a ton of money on a low margin as long as you have a lot of volume. Just ask Wal Mart, Amazon, Big Oil, etc. (2) Not quite the same, because verifone is not a processor. Compare to companies like WorldPay and TSys.

I'm not sure what proportion of square's revenue comes from processing vs services, but if I had to guess, I'd say most of the services are loss leaders for the processing. This is especially true with their rates so far above market. 2.75% is a fat chunk of change if they're processing 10 or 12 figures. (Working primarily with smaller clients, you get to charge that much, but it makes them less competitive with larger merchants who process more volume.)

> 2.75% is a fat chunk of change

Most of that goes straight to the credit card companies/bank, no?

Yes, and scale eats directly into that rate. The Big Box Stores are paying pennies per swipe.

If that's true for credit cards, then they're losing massive amounts of money on cash back and rewards

They make it back from the smaller merchants that are paying the full 2.75%. Local stores need Visa a lot more than Visa needs any one of them, but when you get to the Walmarts of this world the dynamic is rather different; if Walmart stopped taking Visa it would hurt Visa almost as much as it hurt Walmart.

The "issuing bank," which issues your cash back or rewards credit card, has its cut protected by the payment networks. Part of the "interchange," the wholesale cost of processing a payment, is reserved for paying out the issuing bank. The interchange rates are set for the payment processors by the card networks (Visa, Mastercard, Discover, Amex). Whether you spend $100 at the locally owned boutique or Costco, they get paid the same amount. The middleman— the payment processor— gets squeezed by merchants like Walmart and Costco, competing to shrink the margin for the promise of massive volume. But Chase, Captial One, etc. don't have their consumer credit card divisions affected by who processes the card. (Unless you're Citi's processing side with Costco, and only accept Visa. Then your competitors get zero volume from Costco on their mastercards, discovers, and amex cards)

Most, yes, but with plenty left over. They charge this for all transactions, whereas the wholesale/processing rate depends on the type of card. Pin debit transactions clear interchange well under 1%. Visa and mastercard have a few different tiers. There's not much margin in an American Express transaction at that rate, but your average VISA/Mastercard wholesale costs will net out to ~1.5%, depending on the kind of merchant you are and what kinds of cards your customers tend to use. (It's more expensive to process a reward card like the Chase Sapphire Reserve than your local credit union's visa card.) Square covers lots of different merchants, with special prominence in low denomination restaurants / cafes. At scale, that's pretty lucrative.

The danger with that argument is when your realize your Walmart business is actually Sears.

Worldpay and Tsys are small fry, akin to Chase Paymentech or Elavon. First Data is the big monster in the room, with 70% of the market, and all the other processing networks I just mentioned and more make up the remainder.

Wiki lists First Data as 45% of the market, which comes directly from this 2014 article:

http://www.crainsnewyork.com/article/20141201/TECHNOLOGY/141...

True, but the big guys like First Data are out of reach to the size of shops that generally use square. (They can use them, but the fees don't get appreciably more competitive until you clear a certain scale.) I'd say Tsys and Worldpay are appropriate alternatives if you're the size of business who's considering square.

First you sign up X million businesses with the lowest possible processing fee, maybe you even loose money. Then you sell them SASS to manage their operations and sales.

Square Capital. They've made over $1B in loans.[1]

Also confirmed by a friend who works at Square. Internally they're pretty open about the business.

[1] http://fortune.com/2016/11/07/square-capital-1-billion/

Square makes most of it's money from offering small businesses loans secured off the credit card transactions they process for their merchants. They have sold billions of dollars in loans to merchants in the past two years with interest rates very favorable to Square.

The credit card companies themselves have pretty healthy margins. Maybe in the long run, Square could cut into Visa's 3% or whatever.

Genuine question: where in the world does Visa make anything close to 3%?

It's just a slight misunderstanding. Visa (or Amex/Mastercard/other card networks) don't take 3%, but payment processors take a slice which is in that ballpark. To a business, all that really matters is when you accept a credit card payment you kiss a few percentage points goodbye, so it's easy to misconstrue as the card network taking that cut.

> Visa (or Amex/Mastercard/other card networks) don't take 3%

The banks get it. It's the interchange fee

Yeah, I don't know how that fee is divided up between processor/payment network/bank, but it's a fair chunk of change, all told.

The lions share is going back to whoever issued you a credit card. If its say an airline card, that'd be rewards 2 which ranges from 1.65% + $0.10 per transaction all the way up to 2.7% + $0.10. Then you add on network & platform fees (0.1% + $0.06 per transaction) and whatever minuscule profit margin your ISO/MSP can get and your at 1.5% to 2% on average.

Visa Interchange Rates: https://usa.visa.com/dam/VCOM/global/support-legal/documents...

Amex seems to charge between 2.3 and 3.5% [0]. There's no bank in the loop there.

[0] https://www.cardfellow.com/american-express-discount-rate/#P...

Rarely will a business get the 2.3% rate, that is purely a temporary promotion for supermarkets that are new to American Express. Also, Amex acts as the bank, with the same rewards programs and incentives to retain customers.

If you look at Square or Stripe, for example, the fees are way south of 3%. Sure the banks, processors and gateways take a fee but it's nowhere near a total of 3% these days. That was more my point.

They also do payroll and other services which probably bring in a decent amount of money.

The same way any company becomes profitable; they spend less than they earn.

It doesn't seem like the kind of thing you'd have to wonder about. Just like restaurants can be profitable in a low margin industry, it takes incredible awareness of the costs of your business, and the ability to give greater value to your customers than it costs you to produce. Most companies, specifically tech companies, way overspend. Stripe seems not to do that.

Please don't post unsubstantive comments.

Edit: the parent comment was originally just its first sentence. Kinda not nice to do that without saying so.

I didn't mean to misrepresent your reply, I just thought providing more information would make my comment less insubstantial.

Sorry for not indicating it was editted, I'll be sure to do so in the future.

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