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Comment by mitchellst | Hacker News Reader

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.)

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> 2.75% is a fat chunk of change

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

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.

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

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)

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.

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.

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.

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

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

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

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