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Square is taking a bigger bite at the small-business market by offering flat-fee processing to merchants, furthering efforts to present itself as a more full-featured option for card acceptance.
August 16 -
Starbucks' $25 million investment in Square says a lot about the mobile payment provider's appeal to larger merchants — but the coffee chain's decision to leave out some of Square's technology also speaks volumes.
August 8
For Douglas Constantiner, the co-founder of Societe Brewing in San Diego, the decision was a no-brainer. When
"The second I saw their tweet, I immediately went to the account and updated to the flat fee," he says.
Other Square users had a similar reaction to the company's announcement last week that it is rolling out a flat-fee pricing structure to go along with its traditional set-up in which merchants pay a on each card transaction. The owner of a drive-through coffee hut in Gallup, N.M., says he hopes to generate enough volume to convert "as soon as possible" and a candle manufacturer in Columbus, Ohio, who just started using Square at one of his shops is now considering adding it his other stores in advance of the busy holiday season.
Still, the new pricing model is ultimately less about making business cheaper for its regular users as it is for attracting new converts and growing market share, says Gil Luria, an analyst with Wedbush Securities.
"It's not about moving existing customers — it's about getting new merchants to accept Square," he says.
Square, which has roughly two million customers and processes about $6 billion in transactions a year, is not making any predictions about customer growth and is instead playing up the benefit of choice for merchants.
"Square's pricing has always been simple, predictable and affordable, but now that we offer different pricing options, merchants can choose for themselves the price that makes the most sense for their business," said Square spokeswoman Lindsay Wiese in an email. She declined to elaborate on how many businesses Square hopes to convert with the flat fee.
Businesses that opt for the $275 monthly fee don't pay any per-transaction costs for individual sales of less than $400, up to a total of $250,000 in transactions a year. Merchants of all sizes still have the option of paying 2.75% per swipe with no monthly fee.
Square is also looking to build off of a recent deal with Starbucks, which broadened the company's visibility and will expand its scale. Customers at the coffee chain will soon be able to pay with Square's mobile wallet, and the company will
Businesses doing $250,000 in transactions annually will now be paying an effective rate of about 1.3% per swipe, likely squeezing Square's already tight margins even further.
"Whether they can make money on the new monthly fee is really hard to tell," says Wedbush's Luria, adding that the model is "very innovative."
But profitability may be a secondary concern for the company, according to Luria, because Square, launched in late 2009, is
"Very few private companies backed by venture capital make money because it's not what VC's want them to do. They want them to grow very fast so they can either get large or be sold. That's per design," he says.
To that end, the flat fee does seem to be generating substantial interest, at least according to a limited sample of small-business owners interviewed by American Banker.
Societe's Constantiner estimates that the new flat-fee pricing will save the brewery, which opened in May, roughly $8,000 in fees a year.
"For a start-up, every penny we can save goes a long way," he says.
Before opting to use Square, Societe researched a similar product offered by rival Quicken, which charges a flat monthly fee, says Constantiner.
He adds that the simplicity of the Square's program and the very low start-up costs are what ultimately won him over.
"If you're opening a card shop or cupcake bakery-type place, with not too many items, it's a pretty simple process. It'd be a mistake to invest $7,000 into a [point-of-sale] system and pay all these fees to get it going," he says. "Almost everybody has an iPhone or iPad. The cost is extremely low and there's almost no training needed."
Similarly, Dave Rodriguez, owner of drive-through coffee hut Blunt Bros Coffee says that he'd "still be doing everything manually on an old school register and manual bookkeeping" if not for Square, because of the startup costs associated with traditional POS systems.
He opened the shop in late April and isn't currently doing enough business to justify opting for the flat fee, which is typically cheaper than the per swipe fee once a merchant is doing at least $10,000 in card sales each month. But he said in an email that he's looking forward "to converting as soon as possible."
Steve Weaver, owner of the Candle Lab had been thinking about experimenting with Square for some time, before a lightening bolt fried the computers at one of his four soy-candle retail shops earlier this month. He now uses Square at that store.
He says he considers the flat-fee model to be an additional incentive to use Square in other outlets, even though the business can fluctuate significantly across seasons.
The new pricing model is "very attractive … for when we have huge spikes at the holidays. In some of our slower months, like January, we would probably pay less than $275 in fees. But for what we'd be saving in November and December … it's a big improvement over what we're doing," he says.
Using a rival POS system, "we pay really variable rates. … One of the attractive parts of this is, it's so simple to know how much it'll cost us," Weaver adds.
Staff and customers have enjoyed using the new system, Weaver says, but he notes Square can't be used to sell or accept store gift cards, an integral part of the candle shop's business.
"The gift cards are a key piece with it — that's the only hesitation I have from jumping with both feet in," he says.
Others argue that service can be a hurdle, and the company's network is subject to sporadic slowdowns and outages, to the
"They'll get a little bit of a pass early on, because retailers will have gone from not accepting cards to accepting cards most of the time, even if some failures occur," says Wedbush's Luria. "But Square's going to have to root that out, as time goes by, because expectations are going to get higher."
J.P. Goree, a Korean food-truck vendor in the Washington, D.C., area and a Square customer, says he does enough volume in the warmer months to justify the switch to a monthly fee, but he's concerned that transaction costs would rise in the winter, when business tends to slow. Another advantage to the per-transaction fee is that he doesn't have to pay when he takes a vacation or can't work because he's sick.
Still, Goree, who runs the business, Seoul Food D.C., with his wife, Hyun, says he has more of an issue with Square's customer service than its pricing. Not infrequently, Square's network will slow to the point where he can't process transactions, "and when I call to complain, they'll say 'that's the way the ball bounces.'"
"I heard Square is going to start working with Starbucks. I'm hoping that will lead to better customer service," he adds.
Alan Kline contributed to this story.
