Large Businesses May Be Overpaying for Square's Credit Card Processing Services

Credit-card processor Square recently released their Q2 earnings for 2017 and the company continues to outperform analyst expectations, reporting a 26 percent jump in quarterly revenue. A large part of Square's continued success has been attributed to their continued ability to attract businesses larger than the mom-and-pop enterprises for which the processor is known. The number of Square clients with an annualized gross payment volume (GPV) of more than $500,000 grew by 61% year-over-year. And those with GPVs of more than $125,000--which is still a very large figure--grew by 45% in that same time.

During a call with investors, Sarah J. Friar, Square's CFO, noted that the majority of their large and mid-market sellers "self-onboard" to Square "just like smaller sellers [...] at [their] standard pricing rates." That means they are simply signing up themselves for Square by using the processor's website. While Square's pricing model works well for micro sellers, which is those processing less than $10,000 each month, larger firms could be getting significantly better deals by trying to negotiate lower rates or using processors that offer interchange-plus pricing, which tends to be far more favorable for big businesses. Sellers that do over $500k in annual sales could be potentially overpaying by thousands of dollars by simply signing up and not negotiating rates.

Any business that self-onboards through Square is presented with the company's standard rate of 2.75% per swiped transaction — provided that no other special services are added that would increase this cost. There are essentially no other monthly fees or PCI fees that companies need to pay. While credit card processors that are more traditional than Square customarily impose these extra fees, they also typically charge less per transaction than Square. If you're a small shop making just a few thousand in monthly sales, then, Square will almost certainly be the cheaper option. However, if you're one of Square's mid-market sellers, paying the high 2.75% fee on all your transactions is likely greatly outweighing the savings of skipping a few random overhead charges.

The issue with simply self-onboarding, instead of speaking with a sales representative, is that you can't negotiate a lower cost. If a seller is large enough from a transaction volume, they may receive custom pricing. Square already does this for some of their larger clients. However, by self-onboarding business owners are giving up any leverage they may have.

Another problem for large sellers is that Square charges the same transaction fee for all card payments. This is known in the industry as a 'fixed rate' plan. Square's competitors that use interchange-plus pricing models typically charge their customers much less for debit card transactions. That means many of Square's large retailers are overpaying for customers that choose to pay with a debit card.

An Example of How Much A Business Can Save

Take a retailer with $480,000 GPV. About 40% of its customers use debit cards, and those that use credit cards tend to prefer cheaper cards (defined as non-rewards, and non-business). Our models show that on an annual basis, this seller could pay $9,850 or less to process payments on an interchange plus processor -- this includes additional fees, such as PCI compliance. To process that same amount with Square would cost the merchant $3,000 more each year.

SquareInterchange-Plus Processor
Annual Sales$480,000$480,000
Transaction Fee2.75%Interchange + 0.25% + $0.10/authorization
Annual Fee$0$120
PCI Compliance Fee$0$95/year
Batch Fees$0$0.10/batch
Visa FANF Fees$0$35/year
Total Fees$13,200$9,729

Square itself indirectly tackled this issue when addressing risk factors in their latest 10-K filing. The company writes that "sellers may demand more customized and favorable pricing from [Square], and competitive pressures may require [them] to agree to such pricing."

In a call with investors, Friar was asked about where these large sellers are seeing value in Square's proposition. Friar's answer points to two conclusion. First, she speaks to their brand recognition and ability to onboard sellers quickly. "Just like small and micro sellers, [large sellers] come to the website, they've heard of Square, and they are able to get on-boarded and use our managed payments in minutes," Friar said. She also pointed to some of Square's other strengths, such as having funds deposit instantly.

"There's no hidden fees in the backend and we hear over and over from all of our sellers that just that transparency is a huge driver for them," she added.

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