The Green Sheet Online Edition
November 26, 2018 • Issue 18:11:02
Beware the Square effect
In today's highly political atmosphere, all we hear about is the Trump effect. Since the mid term elections are just around the corner, I thought I would use a bit of that model and look at the Square effect and how it has impacted all of us and what we have learned from the company, as well as how to compete with it.
Before Jack Dorsey started Square, most merchants were in a one-to-one relationship with a processor and most likely boarded by a merchant level salesperson (MLS) who visited the merchant in person, sold a terminal and negotiated rates and fees.
For those of us that have been around this industry for a long time, the rates and fees were for the most part straightforward: a discount fee, transaction fee, statement fee and maybe a monthly minimum fee. It couldn't have been easier. However, along the way the rates and the fees started to go up, and additional fees appeared, which started to eat away at the tried and true method of tiered pricing.
This gave way to interchange pass through or cost plus pricing. This method of pricing became extremely popular because, in theory, it was extremely simple. All you had to do is say, "I will charge you 30 points over cost."
Sounds great doesn't it? In the beginning it was great, but as in all things that start out great, time chips away at it, and we all end up looking for a better mousetrap. One problem that appeared with cost plus pricing was the fact that on a competitive basis, all anyone had to do was offer to do it for 20 basis points over, and the next one said 10, and the race to zero profit was off and running.
The second issue was that the brands and the issuers added new rates and increased fees. So even though we, as ISOs and MLSs, never raised our pricing, the cost to the merchants kept rising.
Last but by no means least, statements got to the point where no merchant or MLS can understand them, and it makes it much easier for any competitor to put a spin on what a merchant doesn't understand in an effort to flip the account – even though, in fact, there is very little to no savings.
OK, along comes Square with its little dongle, the ability to sign up anyone in virtually minutes, and with one rate for swiped and one for keyed. No monthly minimums, no PCI, no statement fee or, as I like to put it, no nickel and diming the merchant with fee after fee. All done through Square's website without anyone talking to or visiting the merchant.
What could be better? Most of us didn't really worry about Square since most of the upstart's merchants were lucky to process $100 a month and were the ones we didn't really want as merchants due to very low processing volume. Skip ahead to present day and guess what? Square is kicking all our asses.
And do you know why? Because of one simple reason: Square reached back in time and did what we all used to do and made it better. Square made it simple. One rate, no other fees, only pay when you process a card, easy online application and so on. If that did not make it bad enough, then Square started to offer other services such as cash advances, POS system, faster funding, etc.
Not to make myself look smart, but before Square came along, I told those in my company that I wanted to start offering effective rate pricing. I wanted to take six months of the merchant's statements, determine the effective rate on each one, add them together divide by six, and that would be the average effective rate.
For example, the average effective rate was 2.59 percent. We would lower it to 2.55 percent, which represented a savings, but we would still make a solid profit. So now the merchant only sees one rate times his or her total monthly volume. Simple, right? I would have thought so, but instead of getting more merchants, I was accused of pricing too high or I was told that they could get a 1.69 percent rate.
The problem was that merchants could not quite understand what I was trying to convey, and all they saw was the qualified rate of 1.69 percent. They never looked at the mids, nons, batch, etc. Then came Jack Dorsey and Square at 2.75 percent, and today he looks like a genius.
So, after all this ranting on my part and a trip down memory lane, what have I learned from Square. The answer? A lot. The ability to offer a flat rate and no other fees is what we need to be offering to compete with Square or any other competitor. Merchants all want simplicity, and the ability to understand their statements is more important and appealing to them than how much you can save them.
Every MLS should be not just asking but demanding their ISOs offer a flat rate pricing option where interchange and dues are built into the flat rate. I know that many MLSs manipulate the tiered pricing to offer a hybrid flat rate, but most ISOs will not include the dues in the tier and use it instead as an additional line item fee.
With very few exceptions and if done right, flat rate pricing will produce greater profit and revenue than any other pricing model available today. You just have to know what the flat rate needs to be based on a merchant's average ticket and transaction volume.
I want to offer up a challenge to all processors and ISOs and plead with them to stop offering the same old pricing models and boarding methods, and get off your butts and give MLSs the tools they need to succeed. Clearly Square figured this out and is no longer signing the merchants we never wanted. Square is in our pockets and picking them clean.
Let me leave you with this thought. Square just revealed it is coming out with its own tabletop terminal, so now the company is not only competing for the processing, it will also be getting in the pockets of the terminal makers such as Verifone and Ingenico.
Everyone needs to wake up and see Square for what it is: a well-oiled machine that is a highly funded, major marketer of products and services. It's selling the same products and services that we also offer – but doing it a whole lot better.
Steve Norell is director of sales at US Merchant Services Inc. Based in Port St. Lucie, Fla., he oversees the USMS sales force and maintains the company's bank and processor relationships. You can reach him by email at email@example.com or by phone at 772-220-7515.
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