In preparing my article on the upcoming Durbin Amendment, I came to an interesting realization: Could the Durbin Amendment be the end of Square?
Why?
Well consider this:
Square’s target customer is small business owners. Most of whom have relatively low ticket items. A majority of purchases made on items under $50 are made with debit cards. Just think about the businesses that Square features on their website, food trucks, mom and pop shops, etc. – which card do you reach for when making a purchase at one of these businesses?
This means that the exact merchant that Square targets, is also the merchant most likely to be impacted by the introduction of the Durbin Amendment.
However since Square’s business model is built on one single rate for all transactions, Square has no way to pass on the savings to the business owner. As we discussed in our review of Square, many business owners are willing to pay the slight premium over what a merchant account might cost for the simplicity and ease of use that Square offers. For the business that processes $5000 a month, it might be worth the extra $12 per month. But with the new Durbin pricing available, many merchants might be able to save close to $30 a month. That’s means the business processing with Square is now paying an additional %20 over a traditional merchant account.
This seems like a huge opportunity for the merchant processing industry to really take away the most profitable merchants using Square. Pricing has always been the reason that small business owners with real volume should work with a merchant account over Square, but for those merchant processors that offer interchange plus or have updated their Split Debit and Credit pricing structures to pass on the Durbin savings, the financial impact of choosing Square over a merchant account will be massive.
It will be extremely interesting to see what happens as this new legislation rolls out. On the one hand Square has to be excited, the government has just stepped in and is making their profits rise dramatically. They keep charging 2.75% for all swiped transactions even more for keyed, and are charged less for these transactions by Visa/Mastercard and the banks; pocketing the surplus.
However the cost savings a traditional merchant account offer are going to go way up, which may mean more and more of their most profitable accounts decide to upgrade to a merchant account.
If enough of these merchants leave, Square will be stuck holding lots and lots of merchants than process very little and very sporadically. While I’m sure there will be profits, their projections will start leveling off and they may hit a point where they have to alter their business model to survive.
I’m not sure how long Square can make it if their top customers all leave for greener pastures, and I’m very interested in seeing what their response is. Will they lower their 2.75% to something like 2.5%; do they offer 2 different rates, one for debit the other for credit?
Of course they may just take the extra profits, and assume that their pitch of simplicity will always trump savings. Sadly in an industry where confusing contracts and poorly written deals have burned so many bridges with small business owners, perhaps many will not care some much about overpaying as long as it’s simple.
I’d love to hear your thoughts. Will the Durbin Amendment be the end of Square, or will the new legislation increase the profits of Square beyond what anyone could have expected?
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