Square Sacrifices Revenues to Ramp Mobile Payment Volumes

Square is dropping the rates merchants pay when accepting credit card payments using a mobile phone.

The move is significant because it puts Square’s new rates below the industry standard for small merchants, who typically do less than $1,000 a month in business.

Square is taking the high-risk bet that cutting the rate will fuel its gain in market share as the race heats up in the mobile payments space.

“In the short-term, we will sacrifice revenue, but we believe it is worth the cost because it is the right decision for users and by simplifying payments it will help grow the entire market,” a spokeswoman explained.

Square’s rates will fall to a flat fee of 2.75 percent per transaction instead of charging 2.75 percent plus an additional 15 cents. (The rate for when a credit card number is keyed in, rather than swiped, will remain the same at 3.5 percent plus 15 cents.)

Square’s new rates will resonate well with merchants.

It means that for a $100 purchase, they will now pay $2.75, rather than $2.90. The impact will be much greater for smaller purchases, like a $3 cup of coffee that will now cost the merchant 8 cents, down from previous 23 cents.

There’s also a benefit when a customer visits a coffee shop twice in one day, for example.

Under the old rates, the merchant would have to pay 30 cents for a customer who visits twice a day in transaction fees alone. But under the new rates that goes away and the merchant will only be charged a percentage of both transactions.

Square, which recently raised $27.5 million in venture capital, is trying to gain a foothold in a market that remains inaccessible to many small vendors, who aren’t willing to spend thousands on a point of sales machine.

Instead, it offers merchants the option of plugging a small dongle into a smartphone, such as an iPhone, iPad or Android device to accept payments.

In the mobile payments space, Square competes directly with services being built by mammoth financial incumbents, as well as others like Intuit, PayPal and the wireless carriers.

Intuit, which also provides an accessory for smartphones to take payments, charges 2.7 percent plus 15 cents with no monthly service plan. A high-volume account, which charges more than $1,000, costs $12.95 a month, but drops the rate to 1.7 percent plus 30 cents.

Will Intuit drop its prices to compete with Square?

Possibly. After Square made its card readers free, Intuit followed suit, and said last week that after a short trial period, it was committed to keeping them free permanently.

To be sure, the fees can be baffling to a small business owner.

In a survey, conducted by the Merchant Bill of Rights, it found that only 26 percent of participants believe they are being treated fairly by the debit/credit/prepaid card processing industry, and only 21 percent understand the rates, fees and surcharges they pay.

Still, Square will clearly be taking a financial hit.

It will have to continue to pay the fees being demanded by credit card companies like Visa and MasterCard. But the company said it continues to negotiate these rates with providers.

There is some hope a compromise can be reached.

Recently, Visa wrote about Square in a blog post, referencing a recent interview we did with Square’s CEO Jack Dorsey, who is also the co-founder of Twitter. In the post, Visa said Square provides an easy payment solution for small merchants. It wrote: “We are committed to working with innovative companies, like Square and others, as the world shifts to electronic payments.”


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