Should retailers avoid using Square Payments?
As a business owner, you probably have some mixed feelings about the payment processing business. Many view accepting credit cards as a double-edged sword. On the one hand, you feel you have to provide convenient methods of payment acceptance in order to maintain loyal customers and keep them coming back. On the other hand, you really dread getting that monthly statement accounting for 2-3% of your total credit card revenues. Sound familiar?
After conducting some research, I have to admit that I actually feel bad for new and existing business owners who turn to the internet to seek out a new payment processor. Due to the competitive nature of the industry, the internet is flooded with misleading information. For example, there are countless CPC (cost per click or paid ads) and pay-to-play websites promoting any processors that will ante up to be featured as a "top processor".
Many of these pay-to-play websites do no adequately vet the companies they feature prior to promoting them. As a result, they cost business owners thousands of dollars and a lot of headaches. That being said, there are some very credible websites as well but, it's nearly impossible to differentiate the good guys and gals from the bad.
This lead me to today's topic of discussion, Should retailers avoid using Square Payments?
As a native of St. Louis, I certainly appreciate what both Jack Dorsey and Jim McKelvey have contributed and continue to contribute to the city. That being said, there is no definitive Yes or No answer. Before deriving at a conclusion, you must consider the following:
- Every business within a specific industry operates under a specific MCC (merchant category code: four digit number assigned to a business by the credit card companies; Visa, MasterCard, Discover, and American Express) that defines your cost to accept each individual credit, debit, and commercial card that is processed at your business.
If you own an eating place such as a restaurant, you are classified under MCC code 5812. As a result, a Visa Credit Card being swiped at a restaurant actually cost the business owner slightly more than it would if that same business owner operated a retail store. See the below comparison:
As you can see, restaurants actually pay a higher percentage for both their Visa Credit and Debit transactions.
There's one big problem with the above comparisons. These three cards types are diamonds in a haystack. In reality, there are thousands of different card types consisting of different interchange fees.
What is interchange? The easiest way to describe interchange is the fees that are set forth and regulated by the card associations (think V, MC, D, AMEX) that are cleanly passed on to the business owners BEFORE the credit card companies mark up the rates for their services.
Feeling overwhelmed yet? Hopefully not, however, the payment processing industry is very complex in nature. As a result, many business owners were very excited when Square made their debut back in 2009 because they did a few things that hadn't really been done before:
- Flat Rate Pricing: 2.65% for swiped card & 3.50% + $0.15 for card-not-swiped
- Process Credit Cards Using a Smart Device (this wasn't the norm back in 2009)
- Get Started Today and Get a Free Card Reader!
Square is different from many traditional payment processors in the sense that they are actually an aggregator. As a aggregator, they do not require extensive underwriting to set up merchant accounts using banks or the card associations making it easy to get started accepting payments quickly.
Sounds pretty good, right? Not necessarily.
Based off of our merchant porfolio, we were able to look at thousands of retailers and restaurants average interchange cost. As a result, we saw an interchange spread between 1.80% - 2.25%. Keep in mind, MCC codes, average tickets, and processing enviroments (swiped vs. hand-keyed) can skew these numbers.
Despite the variables in the data, unless you're paying too much to your processor (20% markup on interchange), Square is very expensive for your average retailer or restaurant.
That said, before making a decision as to whether or not your retail or restaurant should use Square Payments, you must also consider your average ticket.
As you can see in the above chart, merchants who have very low average tickets can take advantage of small ticket interchange.
As opposed to charging a Restaurant 1.54% + $0.10 per transaction for an $8 Visa credit card transaction, the interchange cost would drop to 1.65% + $0.04.
As a result, the cost of an $8 ticket using regular restaurant interchange is as follows: $8 x 1.54% = $0.1208 + $0.10 = $0.2208
With Small Ticket Interchange, the same $8 transaction would cost as follows: $8 x 1.65% = $0.132 + $0.04 = $0.172 thus driving down the cost.
Check out the below chart comparing average tickets using Regular Interchange vs. Small Ticket Interchange vs. Square Pricing.
Keep in mind, Square's fees are set at 2.75% with no additional markups, monthly minimums, monthly fees, or annual fees.
Finally, as you can see any transactions under $10 will qualify for small ticket interchange. According to the chart, Square is not cheaper until you reach an average transaction of $3 or less.
Again, these fees do not reflect any processor markups nor does this account for the different reward and commercial cards that drive up cost.
The final result, we generally advise businesses who have an average ticket of $8 or less and process less than $10,000 monthly to use Square. For businesses who have an average ticket over $8, and process in excess of $10,000 per month, don't go with Square.
For high volume retailers and restaurants, there are better alternatives to Square that also offer very transparent pricing. Aside from pricing alone, merchants should consider what kind of added value services are included with their payment services.
We hope this post was helpful. For future post, be sure to follow our blog and browse our website for additional criteria to grow your business.