Square introduces monthly pricing

I've always assumed (maybe erroneously) that Costco received a lower processing fee in exchange for the exclusivity which pushes more transactions.

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.

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.

Deal gets worse for the business the further your revenues are from the $250K limit.

Definitely a big deal though.

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.

To answer 1:

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!

edit: typo

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.

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).

It's a good deal for any business swiping over $10k/month on average.

And if it was possible, it's definitely a TOS violation (though not illegal, unless someone thinks you're laundering money)

* 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.

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.

However, I do wonder what kind of perks you get from a credit card company if you could spend $250k/year with them.

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.

It would be like the phone companies charging you for the cheapest phone plan based on your usage for the month.

It saves a ton of money for merchants who make over $10,000 per month. Those are the people who will sign up for the new plan.