Diving deeper into Block (Square) vs. VISA and MasterCard lawsuit: a payments nerd view.

Today, I thought I’d take a deeper dive into some of the possible drivers of the lawsuit that Block (parent of Square ), has filed against the Card Schemes, namely Visa and 萬事達卡 (case 1:23-cv-05377 if anyone wants to read it themselves!). For those in the TLDR; camp, you can read on!

A few things to be uber-clear on:

- The suit is brought against the Schemes with respect to activities in the United States only;

- The suit is related (solely) to Square’s operation as a Payment Facilitator (e.g. its original basic service of providing card acceptance to merchants);

- There is no mention of Square’s bank license, Cash App, AfterPay (BNPL), related debit cards, etc.

Block/Square allege that VISA and MasterCard engage in “horizontal price fixing” and “vertical price restraints” because they set the interchange fees for all credit cards and some debit cards (e.g. those that are not capped by the Durbin amendment).

There are two (very) different issues at play here:

1. The interchange fees set by each of VISA and MasterCard, but which are ultimately revenue of their respective Issuers, and
2. The non-interchange per location fees set by VISA and MasterCard (FANF and MLF respectively) which are revenue of the Schemes themselves

This is far from the first time that VISA and MasterCard have faced a lawsuit in regards to their US Interchange fees, although again, Interchange doesn’t benefit the Schemes but rather their Issuing Customers.

I don’t recall any prior lawsuits involving FANF/MLF, but it’s unsurprising for a number of reasons:

1. Square’s business model doesn’t include any kind of monthly flat or minimum fees billed to Sellers, to offset the fees it is paying its sponsoring acquirers, and indirectly, VISA and MasterCard, for the FANF and MLF. Note: Square does charge SaaS fees when you use some of their value-added software, but that’s optional and more tied to the software than pure Square terminal processing.
2. Square literally has *millions* of US-based sellers, many of which are very small and therefore may not “cover” the fixed/minimum monthly fees charged to Square for such sellers’ accounts

If we take a step back, for smaller sellers, Square has a very simplistic pricing model, which abstracts all the complexity of Interchange, Scheme Fees (both processing and fixed fees such as the FANF and MLF), cross-border fees and the like. In-person payments for smaller US sellers are today priced at 2.6% + $.10, regardless of what all the underlying costs are, including what card is actually presented.

It should be very clearly stated, that Square is making TONS of money on most debit cards that are issued by the large, Durbin-capped Issuers, because Interchange on those transactions is restricted to 5bp and $.22. Yes, for very small tickets, this is untrue, but on a $75 average ticket for card present transactions, the base interchange cost is $0.26 and Square earns revenue of $2.05 (!!!!). Of course, Square is blending all of its costs and so on credit transactions, it may be making very little or even losing money on those (e.g. foreign cards, business and corporate cards, platinum cards, etc etc). The point is, Square has averaged all this across its portfolio and knows exactly what its average spread is across all card types. Yes, if that mix changes, Square gets squeezed, but this is how they've architected it. They specifically decided NOT to pass through the true cost of Interchange etc per transaction to their sellers.

Square has been pricing and operating this way FOR YEARS. It didn’t suddenly wake up and realize it. In fact, it signed up to this model in its negotiations with its sponsoring acquirers. It is true that the FANF and MLF were introduced after Square launched itself as a Payment Facilitator, but nothing forces Square to be a Payment Facilitator. There are other business models including ISO, or now even as Acquirer itself (given its banking license). Square decided for itself that, given the friction it wished to eliminate in onboarding submerchants, it accepted the pain that goes along with being the first in line obligated party vis a vis its sponsoring acquirers, to reimburse Interchange, the Scheme Fees, and any acquiring sponsorship/processing fees. It also decided NOT to introduce any kind of flat or minimum fees to its smaller sellers.

For Square to come along now and throw their toys out of the pram for being beholden to all this, is extremely self-serving.

A little more food for thought: Square just recently introduced an AMEX credit card for sellers, which extends a line of credit effectively against card transactions (including their VISA and MasterCard transactions of course!!!). At the time, I thought selecting AMEX was a curious choice, but now it makes all the sense in the world, since AMEX isn’t part of the suit!

Part of me wonders if this is all just leveraging - similar to what mega retailers like Wal-Mart and Amazon have engaged in with the Schemes previously?! In other words, put pressure on the Schemes to reduce fees (particularly the FANF and MLF, which are Scheme-only revenue) rather than going the whole distance in the lawsuit?!

As always, this should be interesting to watch, although it may take years to play out.

Side-note: Most payment facilitators are in this boat, so presumably they're all watching this space too!