Be PayPal or be Square!

Square was set up to take small businesses who previously chose NOT to accept credit cards payments to avoid 3-5% fees.  Square offers them (a little) lower fees, hope to convert them to use credit cards.  A big benefit though that customers don’t need carry your credit cards around or give out credit card numbers, Square can scan the cell phone (like PayPal).

The customers, on the other hand, do not have additional benefit.  It is not more convenient – look at Square commercials that a retailer or customer will take the same amount of time, or even more steps, to process a payment.  Actually, the retailer instead of just swiping the card, need to bring out a portable pad out physically to the customer so they can either scan the cell phone, or swipe the card with the square., and guess what, the customer still have to sign on the pad. When you go to Wal-Mart, use your credit card to pay, and need not sign anymore.

If Square seeks to help customers not to carry credit cards around or give out credit card numbers, PayPal (also a recent IPO) already did it and they have 69% “online platform” payment market share – way bigger than VISA, Amazon).

If Square is trying to beat PayPal fee (around 2.5% fee), Square is not doing it yet, because Square charges 2.7% and its margin after paying the credit card companies is so small (less than 20-30 basis points) – that is why Square is still at a loss of $200 million.

Square is paying to get the market share by (1) changing non-credit card retailers to use Square, (2) changing customers not to carry credit cards but use cell phone to pay.

The only new thing that Square is offering more than PayPal is, at this point, to offer retailer software to track transaction details and payment history so it is more efficiently managed for a large business.  However, this is not a significant advantage because (1) it is just a software, anyone can add it tomorrow, (2) “large” businesses already have their in-house transaction software – that is why Square cannot get enough large businesses on board yet, (3) Mom and Pa’s stores which they are trying to convert do not need complicated enterprise system to track Mom and Pa’s daily transaction history.

The hope for Square success is (a) to convert enough non-credit small businesses to use Square, by charging significant lower fees; (b) to convert customers to use cell phone, rather than credit cards to pay, (3) the Square transaction volume needs to be big enough so other credit card companies will charge Square a lower fee, which leave Square a higher net margin to be profitable.

Therefore, 3 important words again, “Transaction Volume! Transaction Volume! Transaction Volume! “

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