Kudos for the "ballsy" simplicity. I don't know if people appreciate how big of a risk this is for Square.
Square is placing a big bet on the numbers working out in the long run. If their analysis is just a little bit wrong, they're going to burn through millions of dollars in losses.
Why? Because the 1.3% "sweet spot" is almost certainly well below their cost. "Interchange" is the wholesale rate that processors like Square pay to card networks. Visa & Mastercard publish their rates and as far as anyone knows they're not negotiable. According to FeeFighters which did a lot of public research around rates, the average interchange rate for a typical card mix is:
1.58% + $0.13 per transaction
Unless they've figured out a way around standard interchange, this is Square's approximate cost.
Remix that into a 2.75% flat rate and you'll find that Square already charges less than that cost for purchases below ~$6 (even considering that there's a special, lower small ticket interchange rate). And now for businesses that hit the sweet spot around $17-21K/month, Square's probably also taking a loss.
No doubt Square is betting on a mix of merchants that fall in the profitable peaks between those troughs. All in the name of simplicity.
Are these numbers truly non-negotiable? If that's the case, what's the incentive for a company like Costco to have exclusivity with American Express (who normally charges a higher than average fee)?
I've always assumed (maybe erroneously) that Costco received a lower processing fee in exchange for the exclusivity which pushes more transactions.
AmEx is negotiable (though usually it's the most expensive.. and Square cannot offer AmEx exclusivity like Costco can). Notice I said Visa & MC are the standardized, non-negotiable rates.
But you're right, they're not totally non-negotiable. Supposedly very huge retailers like Walmart get better rates. But Walmart does probably 20X Square's volume, even with Starbucks folded in.
I don't disagree (in fact, I think it probably is the case that they get a lower rate for being exclusive), but just to add: Costco also has a partnership with amex issuing their Costco branded credit cards (which isn't a store only card, it works out in the wild), and Costco gets some portion of the revenue whenever that card is used. Restricting you to amex also has a benefit of increasing the likely-hood that consumers will sign up for the Costco cc.
That makes a lot of sense, and it's also clear that transparency regarding rates isn't exactly in the vendor or the credit card companies' best interest.
Assuming you can't back in and out of wholesale ($275) versus retail (2.75%) pricing, it doesn't matter how volatile your earnings are - doing 0 for eleven months and x in month twelve is equivalent to doing x/12 for twelve months whether you pay 2.75% or $275 each month.
Square is placing a big bet on the numbers working out in the long run. If their analysis is just a little bit wrong, they're going to burn through millions of dollars in losses.
Why? Because the 1.3% "sweet spot" is almost certainly well below their cost. "Interchange" is the wholesale rate that processors like Square pay to card networks. Visa & Mastercard publish their rates and as far as anyone knows they're not negotiable. According to FeeFighters which did a lot of public research around rates, the average interchange rate for a typical card mix is:
1.58% + $0.13 per transaction
Unless they've figured out a way around standard interchange, this is Square's approximate cost.
Remix that into a 2.75% flat rate and you'll find that Square already charges less than that cost for purchases below ~$6 (even considering that there's a special, lower small ticket interchange rate). And now for businesses that hit the sweet spot around $17-21K/month, Square's probably also taking a loss.
No doubt Square is betting on a mix of merchants that fall in the profitable peaks between those troughs. All in the name of simplicity.
Sources: http://feefighters.com/square-calculator http://usa.visa.com/merchants/operations/interchange_rates.h...