Congratulations to Square for making people that it was in the mobile payment business.
Square is typically the kind of Company with a great initial product that raises too much money for its own good and end up chasing 500 battles because they have the team do so. Fab comes to mind as well.
Square has a significant problem: their product is mostly used by merchants with low average selling prices (ASP) and their pricing model (flat 2.7% vs. the usual X%+0.3) kills their margins at this price point. On the other hand, their POS, which could/should allow them to sign more sophisticated retailers or restaurants with higher ASP does scale with businesses because it does not have any of the workflow management features that are necessary.
Overall, they are stuck with an unprofitable customer base and with a (beautiful product) and are trying to throw things on top of this to create a consumer product (like the failed Pay with Square thing).
Can you elaborate? My understanding is that most merchant accounts are in the 2% + .45 range. Are you suggesting that merchant margins depend on a 1% margin?
2% can have a big impact. Many business have a gross margin of 20-30%. If you take Square's 2.75% from $100, that's $2.75 off a $20-30 gross margin – or 9.2% to 13.75% of the gross margin. That is a very large cost for a service seen as a commodity.
Square gets 2.75%. They pay their acquirer (I think Wells Fargo) Interchange+maybe a small fee. For example a swiped (card present) debit card purchase at a retail store is 0.80% + $0.15 (an example - this varies wildly). On $100 that's $0.95. They get $2.75. That's a 60% or so margin. It can also go down quite a bit depending on the type of card used which they really have no control over. For example it could drop to 20% on a corporate rewards card. I would say overall they probably have a very good margin.
Sure.
If your ASP is $6, then 2.75% is $0.165. This is to be compared to a merchant account for which the 2%+ 0.45 is $0.57. As you can see there is a huge difference.
The problem is that credit card processors (Visa, Mastercard...) are charging Square 0.1+1.5% or something which basically means that Square loses money on the transaction.
If this was a play for consumers, then I would agree with you. However, this is a play for businesses, and there is not a day that goes by where SMB aren't hounded by mobile payments startups. Rarely does a B2B startup succeed bc they do things better, they succeed bc their sales staff is relentless.
Saying your product is nicer, cleaner, a better user experience rarely convinces a business.
I'm pretty much a Square fanboy at this point. I'm sure they could improve, and are actively working to do so - but I wouldn't label Square's products as average.
It has < 50k downloads since its launch (almost half a year ago now), I wouldn't call it fantastic if the main function is to spread the word. (not that it is not a great product, the app is awesome!)
You don't need the app to use the service (cc: cash@square.com or request@square.com). We have no idea how many people are using the service.
Remember that for every single person that uses it, they gain another user on top of that. Even more potentially with request@. I consider that a fantastic marketing tool since it must effectively cost them very little to run the service.
'“private-market valuation could not be substantiated by their revenues as a public company,” said one person with knowledge of the company’s activities.'
I'm also guessing that they now have to figure out how to redesign their product for C&P, post-Target. That's going to be expensive, as it'll change the backend as well as the reader - and require significant certification as a two-part system.
Square is typically the kind of Company with a great initial product that raises too much money for its own good and end up chasing 500 battles because they have the team do so. Fab comes to mind as well.
Square has a significant problem: their product is mostly used by merchants with low average selling prices (ASP) and their pricing model (flat 2.7% vs. the usual X%+0.3) kills their margins at this price point. On the other hand, their POS, which could/should allow them to sign more sophisticated retailers or restaurants with higher ASP does scale with businesses because it does not have any of the workflow management features that are necessary.
Overall, they are stuck with an unprofitable customer base and with a (beautiful product) and are trying to throw things on top of this to create a consumer product (like the failed Pay with Square thing).