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The Green Sheet Online Edition

September 10, 2012 • Issue 12:09:01

Square reaching beyond micro-merchants with flat rate

Square Inc. continued its push into the payments world when it introduced a monthly flat processing fee for small businesses Aug. 16, 2012. Square said merchants who process up to $250,000 per year in card transactions can now choose a flat monthly processing fee of $250, with no additional fees or contracts. Merchants will have the option of continuing to pay a fee of 2.75 percent of every transaction instead.

Square said its flat monthly fee is the first pricing option that gives small businesses a lower processing fee than bigger merchants.

"For 62 years, merchants have suffered complicated, expensive fees," Jack Dorsey, Square founder and Chief Executive Officer, said. "Square is the first company to rethink electronic payment pricing with the merchant in mind. We are giving merchants affordable, predictable pricing. With one monthly price, merchants know that the sales they've processed in a day is the same amount deposited in the bank."

The new pricing comes just a week after Square revealed that Starbucks Corp. invested $25 million in Square, and the coffee company will use Square technology to process card transactions in its network of 7,000 stores.

Mobile payment consultant perspective

Todd Ablowitz, founder and President of the consulting firm Double Diamond Group LLC, said Square's new pricing and the Starbucks partnership show Square should be taken seriously as a competitor. "This is the signal that Square is not just about the micro-merchants they were going after," he said. "They are interested in that sweet spot between the micro-merchant and the huge retailer in the level 2 and level 3 tier where the acquiring industry traditionally is."

Ablowitz noted Square is willing to disrupt pricing and technology to make a space for itself in payments. He added that ISOs will have to give merchants new reasons to continue to use their services, and offering better service is one way ISOs can compete. However, he noted that "the best way to do that is to remove the need for services at all" and "Square is doing that."

The consultant believes it is time for the payments industry to take Square seriously as a competitor. "I wonder how much longer the non-believers can keep dismissing it when it keeps working?" he asked.

A CPP's analysis

Thomas Waters, a Certified Payments Professional (CPP) and Director of Sales of Bank Associates Merchant Services, said that when numbers are analyzed the Square flat rate may not be so great.

"While the new pricing program recently rolled out by Square may at first sound attractive to merchants and disrupting to competitors, basic math shows us that only a small percentage of the market may truly benefit from this restructure of fees," he said. Waters' calculations indicate many businesses may pay as much as a full percentage less per month than the 2.75 percent Square charges, depending on the industry and transaction size.

Waters noted that a monthly fee of $275 based on a processing volume of $10,000 is "about average" for any merchant processor. "But a business's volume varies per month, and the effective total rate will increase as volume decreases," he said. "For example, a month where volume is only $5,000 your effective rate essentially doubles to 5.50 percent, which is significantly high. Also, considering that there is a cap on that monthly fee at around $21,000 in volume, that leaves a pretty small 'sweet spot' of monthly volume where the new pricing will be competitive against a typical merchant account."

Waters pointed out that the monthly fee program only applies to swiped transactions, so merchants will still pay 3.5 percent and $0.15 for card not present transactions on top of the monthly fee. "There may be some businesses that can actually benefit from this program, but it's very likely they are few and far between," he said. "It is true that simplicity is an effective means to retain new business, but I'd put my money on an educated agent or ISO over a Square flyer any day." end of article

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