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Is Square Right For Your Business?

December 13th, 2011

I stopped in a local, independent coffee shop last week. As I went to pay I noticed a stand-alone credit card terminal next to the POS system on one side, and an iPhone with a Square ( card reader on the other.

I asked the barista which device they were using for credit card processing. She said, “The owner is switching to Square because he can save two to three hundred dollars per month.” My immediate reaction was that either she misunderstood what the owner said or the owner was misinformed.

“$300 per month?” I asked. “Wow.” I was incredulous because after over a decade of analyzing statements and comparing merchant’s costs of processing credit cards, I knew saving $300 per month was only possible if the merchant was processing a tremendous volume or had highly inflated pricing, or both. So I decided to look further into Square and see what kind of real impact it could have on a traditional, retail merchant.

Square came on the scene in February of 2009 and has been opening accounts at a rapid pace. The company currently processes about $4 million in payments each day, and expects to process $1 billion in volume within a year.

Square’s original business model was to provide simple payment processing to small vendors, artists, etc who couldn’t afford the expense of a traditional merchant account. The appeal of Square is in its simplicity and ease of enrollment. They charge a flat 2.75% for transactions swiped with the reader and 3.15% plus a 15 cent transaction fee for keyed in sales. Square charges no other start up fees, monthly fees, or gateway fees. All of these expenses are absorbed into the flat rate (blended pricing). Just about anyone can apply for the account and get the free credit card reader (“dongle”) that plugs into the headphone jack of a Smartphone- these devices were even recently handed out at a local hockey game! A merchant then downloads a free app for their smart phone or tablet, enters some basic personal information at, the bank account is verified, and they are up and running.

Square’s leadership, which includes Twitter co-founder Jack Dorsey, figures to come out ahead using a blended price model: interchange, authorization and settlement, customer support, gateway, and any other expenses (let’s not forget profit) are all averaged into one flat price. Depending on the transaction type and interchange cost, they are losing money on some number of transactions while over pricing others. And there seems to be no reduction in Square’s fees to reflect the recent law lowering debit costs. It is important for Square to shake out a positive mix on these transactions to become profitable and stay in business.

Let’s take our local coffee shop. I happened to spend $7 for two beverages on my debit card. Under the new price guidelines, a $7 debit card transaction has a processing cost of 3.43% before Square or any traditional processor makes even a fraction of a penny in profit.


Here’s how:

New debit interchange cost of .05% + 21 cents per transaction.
Plus  .11% for dues and assessments and $.019 for NABU/APF.
This a total cost of .16% and 22.9 cents.
.16% X 7 = $.0112
+ $.229
.24 / 7 = 3.43%


So Square is essentially losing a nickel on that $7 transaction (7 X 2.75% = .19 – .24 = -.05). Of course they are making significant profit on merchants with larger transactions.

Perhaps that’s great for the coffee shop merchant in the short term; what business wouldn’t love to get any raw material at 19% below what it costs to manufacture? But even with Square’s millions of dollars in venture capital to back temporary losses, they will have to make a consistent profit eventually. So I suspect that our coffee shop owner can indeed see some savings in the short term, but they are not likely to last.

I predict that Square will have to do one of two things once they are firmly embedded in the market:

1.    Eventually raise pricing across the merchant base to stop the bleeding (remember, right now they have very deep pockets and can afford to lose revenue while they build), or

2.    Leverage the card brands to drive down their wholesale pricing. The latter is unlikely as competitors such as PayPal, which is much larger, have not been able to affect pricing so far.


Here are a few additional points to consider besides cost:

1.    Consider the customer experience and perception. It seems that currently Square’s target market is the part-time craft person or handy man where credit card payments are not a daily affair. How would you feel if you walked into Best Buy or Target and they handed you an iPhone at check out? Maybe you wouldn’t care, or maybe you would have concerns about whose phone it is and what account it might be tied to.

2.    There are very real security concerns. The system has already been hacked and can easily be turned into a skimming device. While the software is compliant with security standards, the Square reader does not encrypt card data. Other vendors we deal with offer smart phone devices that scramble card numbers in the reader before they ever reach the phone software. Square has the potential for major card data exposure. This is from the Square agreement:

“We have implemented technical and organizational measures designed to secure your personal information from accidental loss and from unauthorized access, use, alteration or disclosure. However, we cannot guarantee that unauthorized third parties will never be able to defeat those measures or use your personal information for improper purposes. You acknowledge that you provide your personal information at your own risk.”

3.    Traditional merchants lose integration with existing POS systems. You would have a device outside of your POS terminals that would act like a standalone credit card terminal- no reporting or accounting tied to your software.

4.    The transaction time is slower than an IP-connected POS system or terminal. How would lines be affected by 5-10 extra seconds per transaction? Connectivity is slower and the card readers are sometimes inconsistent in capturing the magnetic stripe data. What if a customer wants a receipt? Are you going to collect email addresses on the device for every customer and have them sign with their finger at the counter as is the current functionality of the app?

5.    Support seems to be an issue. All support is handled by leaving a voicemail or sending email. The option of speaking with a live person when you want to does not seem to be available to Square users. The latest numbers I can find state that there are a total of about 100 employees at Square (up from around 60 at the beginning of the year) supporting many, many merchants: Square claims to be adding 100,000 merchants per month. Of course “adding” might mean software downloads. It’s no wonder there are many complaints about service in online forums.

Overall, I actually think Square is a fantastic solution for the right merchant. I also feel they will continue to evolve and make inroads into different sectors of the marketplace such as larger retail and perhaps ecommerce. But for now, traditional merchants are best served by traditional merchant accounts. Transparent, cost-plus pricing is always going to be more advantageous for retail merchants. Convenience and simplification are great, but often come at a price.

Entry Filed under: Advice

2 Comments Add your own

  • 1. Tania  |  March 20th, 2012 at 5:29 pm

    This article has some good points, however, Square now offers a complete POS solution, and their iPad application supports a cash drawer and a printer for receipts, it has inventory and user credentials, also their card case app takes care of dealing with the hassle of sliding cards and the receipt problem in case the merchant didn’t have the cash drawer or receipt…
    The Square team always handled our emails promptly, in the very few times we needed to contact them to request about some hardware compatibility with the app.
    we were dragged before into two major credit cards processing companies, one we had to pay $800 to integrate with our existing POS software and the other wanted to charge us a lot of settlement fees, batching fees, monthly charge fees, if we processed more than $15 they wanted penalty fees and more more fees to come…
    Square was very simple and no hassle to worry and deal with, and 2.7% was great for us if we didn’t have to deal with anything else, and the BEST deal is that in the morning out money was in our bank account… Never ran out of cash!

    We are looking forward for PayPal Here app which hopefully will offer square features or better!
    God Bless Capitalism…

  • 2. Laura  |  April 10th, 2012 at 4:06 pm

    Square is holding over 35 thousand dollars on our Company account, they say for 90 days. Who knows if we will EVER get it.

    There have been 70 complaints file with the San Francisco BBB alone in the past 12 months.


    They just assume this is O.K. No problem, we don’t need the 35k that we worked so hard for to pay our bills. PLEASE! I have heard from MANY customers who have experienced the same thing.

    If you are reading this, chances are you too have had a problem. Report them to the Following: States Attorney General in California AND your own State (do both), and the BBB.

    They need to be STOPPED!

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