By Patti Murphy
The news that Square is withholding up to 30 percent of business customers' card receivables for as long as 120 days should be a wakeup call for any ISO or merchant level salesperson (MLS) wanting to compete with Jack Dorsey's payments business.
Dorsey made a big splash when he rolled out Square in 2010. The idea initially was to offer a simple, low-cost way for artisans and street vendors to accept credit and debit cards using small card readers that could transmit data using the headphone jacks on smartphones. But it has had many other takers.
Square makes it incredibly easy to apply to accept credit and debit cards, with short online applications and free card-reading dongles. And because Square is considered a Master Merchant under card-brand rules, it, rather than individual merchants, assumes responsibility for PCI-related hassles, like required self-assessment questionnaires. Plus, its initial pricing—a flat rate of 2.75 percent for swiped, dipped or tapped transactions, and 3.5 percent plus 15-cents for key-in transactions—was simple and undercut the rates most ISOs and MLSs could offer these businesses.
The company's offerings quickly expanded to better compete with legacy competitors. It developed Square Stand (which converts an iPad into a POS system), Square Market (a tool to create online storefronts), an order delivery app, and Square Capital (a merchant cash advance service).
Square's pricing formula has left payments experts scratching their heads, wondering how the company could make money by charging clients rates that barely cover interchange. (The standard interchange rate on transactions initiated with plain vanilla Visa consumer credit cards, for example, is 2.70 percent plus 10-cents. Interchange on the same transaction using a Mastercard credit card is 2.95 percent plus 10-cents). Well, it hasn't: Square has been operating in the red since its inception, reporting $109 million in transaction and loan losses for the first quarter of 2020 alone.
Despite the red ink, Square has been a darling among investors since going public in 2015; it had a market capitalization of $45.36 billion as of June 29. Even before it went public, Square was able to secure investments from the likes of Starbucks—and Visa, which today holds about a 2 percent stake in the company.
Businesses using Square, meanwhile, are beginning to sour on the company. For starters, they're spending more to process payments. In 2019, Square changed its pricing structure in a way that proved especially costly for small-dollar purchases. Based upon at least one analysis I read, for example, a business processing a $5 coffee purchase through Square now pays 23 cents, up from 14 cents a year ago.
Now, the company is holding back significant shares of individual merchant receivables in the form of rolling reserves as a hedge against chargebacks. Square, in a blog post, said these reserves are assessed only on "risky sellers," and that it holds reserves on "fewer than 0.3 percent" of sellers.
But that may not be the true extent of things. A web designer using the platform told the New York Times that Square has been holding 30 percent on each transaction since early May, totaling $4,000 as of late June, despite his business having no history of chargebacks.
The timing couldn't be worse, of course, as many small merchants struggle to stay afloat amid coronavirus-related business disruptions. As of June 29, nearly 2,000 small businesses had signed an online petition calling on Square to stop. "Many small business owners are fighting for survival and cannot afford for this to happen," the petition reads in part.
I don't see Square changing course. But I do see an opening for ISOs and MLSs to call on these merchants and offer better deals with simplified, streamlined application and setup processes that are now available through many upstream partners. As Ryan Malloy, senior vice president for partner sales at North American Bancard, related during a recent Merchant Sales Podcast interview: "We have reps who are calling on merchants, and leaving with them activated."
Clearly, now is a good time to start selling against Square.
Patti Murphy is senior editor at The Green Sheet and self-described payments maven of the fourth estate. Follow her on Twitter @GS_PayMaven.
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