Surfair

What's your business model?

46460

How does Square make money?

The payments startup may be looking at an IPO this year, but where does its money come from?

Innovation series by Faith Merino
January 10, 2014 | Comments
Short URL: http://vator.tv/n/344c

Square may or may not be entertaining the thought of an IPO this year. The rumors have been making their rounds—supposedly of talks with banks, like Goldman Sachs and Morgan Stanley. And Square hired former Salesforce.com exec Sarah Friar as its new CFO last year.

The company is on track to generate $1 billion in sales this year from the $30-or-so billion in transactions it expects to process, according to a report from the Wall Street Journal. In 2013, the company reportedly generated $550 million from the $20 billion in transactions it processed. However, some 70-80% of that revenue gets funneled back to credit card companies, so Square’s revenue was more likely in the range of $110-165 million.

While the company has admitted that it’s not profitable, CEO Jack Dorsey is rumored to be brewing a new strategy that will quickly move the company to profitability.

In the meantime, how exactly does Square make money?

Let’s start with the processing fees. Square charges 2.75% per swipe, or 3.5% plus 15 cents per manually entered transactions. So if you swipe a card for $100, you’ll get $97.25 out of the whole shebang.

Now, that 2.75% fee isn’t straight profit for Square. Square is an aggregator, not a credit card processor. A company called Paymentech processes transactions for Square and J.P. Morgan Chase is Square’s acquiring bank. That means Square has to pay interchange fees that banks charge (the fee charged for money transferred from an acquiring bank to the issuing bank) and the assessments that major credit card companies charge. Interchange fees and assessments are identical across all processors and no processor can charge a lower rate than another.

BUT, debit cards come with lower transaction fees. Square still charges merchants 2.75%, but keeps the savings for itself. This may be the driving force behind Square Cash, the company’s recently announced peer-to-peer payment service. Square Cash is free, and users need only send a friend an email to the person they want to pay CCing Square and including the amount. Square will then email you to ask for your debit card, no Square account needed.

Square had, at one time, offered the option of paying a flat rate of $275 a month for companies processing less than $250,000 a year, but Square discontinued this option in November.

Square charges the same 2.75% transaction fees on online transactions via the Square Market. Brilliant. While you’re waiting for everyone to catch on to the Square reader, why not just sell shit yourself? The Square Market is fairly broad—it’s not a niche marketplace, so you’ll find everything from coffee beans to handmade soap and throw pillows. What it does drill down on is local merchants and artisans, so it’s reminiscent of Etsy in its focus on small makers and merchants. 

Square also generates revenue on its hardware sales. Naturally, there’s the Square card reader—the dongle you plug into your smartphone or tablet (I really, truly love merchants at the farmer’s market when they use Square). Those retail for $9.99, so they probably break even on cost of production.

But then there’s the Square Stand, a combination reader/register stand, which runs $99. Square recently announced that Square Stand is now available in over 1,000 Staples locations (there was even a promotion in which customers who bought a Square Stand at a Staples location during November 2013 would get a Staples gift card worth $200).

So what’s up Jack Dorsey’s sleeve? If the rumors hold true, we’ll be seeing a new money-making Square strategy soon. 

 


Related news


blog comments powered by Disqus

Featured Stories

Mbp-300x250

Other episodes of this series

How does trivago make money?

18878

What's your business model?

by Steven Loeb
The hotel search engine charges hotels for referrals on a cost-per-click basis

How does Delivery Hero make money?

18860

What's your business model?

by Steven Loeb
The company, which recently announced an IPO, takes 10 percent per order on its platform

How does Crunchbase make money?

18825

What's your business model?

by Steven Loeb
Crunchbase used to rely on advertising, but now makes money from premium products and its data

How does Robinhood make money?

18805

What's your business model?

by Steven Loeb
The company introduced its premium offering, called Gold, late last year

How does Pinterest make money?

18742

What's your business model?

by Ronny Kerr
As with its peers in the social web, Pinterest leverages its millions of users to attract ad dollars
Mbp-300x250