Such a simple, elegant solution to fixing an abusive and shady marketplace.
Square completely clicked for me when I recently paid for coffee @ a small neighborhood stand.
Their digital receipt was cooler than anything I've seen at big merchants, and because they virtually give away the service and eliminate the monthly every small business owner is going to wind up using them.
At $4m a day their take is ~2.75% or ~$110,000/day revenue - figure they've got 100x that in potential growth?
Some (most?) of that 2.75% is going to other people. I know nothing about Square's internal infrastructure - but they are either paying ~3% to some other payment processor, or have become their own processor and are paying ~2% in interchange fees directly to the issuing bank. So, in the best case, Square is pulling in closer to ~0.75% => $30K/day in revenue.
To make matters worse, that 2% in interchange fees is an average across all credit card transactions. But most interchange agreements are "fixed fee + percent of transaction" and I suspect Square's average transaction is significantly smaller than the average credit card transaction. That would imply their cut is even smaller than the 0.75% that it would be otherwise.
On the plus side, at scale Square should be able to directly negotiate better interchange fees with issuing banks - but I'd be very surprised if they ever drop below 1% on average. It would be impressive (but possible, given Square's pull in the industry via Visa et al.), that they've already pulled off some agreement to that effect.
Some processing companies include interchange as revenue and some don't. If Square does, then they still have ~$110,000 / day in revenue, and what you're calculating is their profit. But you're still right that they have high variable costs because of interchange and therefore may not be as profitable as one might think with that revenue.
As an example, Heartland includes interchange in their revenue. "Heartland reported $526 million in gross revenues for the quarter... Interchange accounted for $365.2 million of second-quarter revenues."[1]
At Braintree we don't include interchange in our revenue, so our processing volume is higher than Square's, but our revenue is lower.
That's interesting... I wonder why there is no GAAP measure for accounting for pass-through revenue. I can see it both ways (this problem exists for Groupon as well, who counts the full amount of the voucher as revenues even though they pass half of it on.
Square, like all other merchant account providers has to pay interchange fees, which are ultimately sent to the banks that issue credit and debit cards, and assessments, which are how Visa and Mastercard make their money. It is possible that they have negotiated a sweetheart deal with Visa and Mastercard, for lower interchange rates, but I think it is unlikely.
With their pricing scheme Square loses money on every transaction below ~$6 in size. They will make money for transactions between $6 and $15, will lose money between $15 and $18 and will make money on transactions larger than $18.
The reason for the weird discontinuity at $15 is that Visa cards and Mastercard Debit (but not Mastercard credit) cards have a special, lower, rate for small transactions called a small ticket rate. If you are a merchant with a very small average transaction size, you absolutely should use Square - their price is so low for those transactions they are losing money and subsidizing the user.
In reality, their average transaction is not as small as you'd think. It's actually ~$83 (some simple math from the screen Jack posted on his twitter), so they are making a good deal of money, but at much smaller margins than most people realize.
While i love Squares concept I wonder how they would handle international growth, i see that as being very difficult. But maybe they dont even need that.
In most of Europe (im from GER) most people dont even have credit cards. I have also never ever seen someone pay for something like a coffee with a credit card here, to me that sounds absurd
I pay with a credit card for everything possible - I don't have to worry about carrying cash, don't have to carry change, it takes less time, and I get a comprehensive list of everything I've bought (and for how much) at the end of every month.
To me, extending my credit card usage from interactions with stores to interactions with people (a la Square) would be (and is) awesome (no more checks!).
Square completely clicked for me when I recently paid for coffee @ a small neighborhood stand.
Their digital receipt was cooler than anything I've seen at big merchants, and because they virtually give away the service and eliminate the monthly every small business owner is going to wind up using them.
At $4m a day their take is ~2.75% or ~$110,000/day revenue - figure they've got 100x that in potential growth?