7 ms·

So two things that I've never understood. 1) Why is it just now that someone's actually providing competitive service in this space? We've had people selling C

by tibbon 14y ago

So two things that I've never understood. 1) Why is it just now that someone's actually providing competitive service in this space? We've had people selling CC machines and service for years... 2) Where (in general, not just with Square) does the money actually go? It seems that prior to Square announcing this, getting under 2-3% or so was nearly impossible. On the scale of the US economy alone, that's HUGE money. What are the fixed per-transactions costs? Its just pushing around bits in a system right?

bgentry 14y ago
There are virtually no fixed costs to actually performing the transactions. The fees are levied by the not-so-competitive Visa/Mastercard/AMEX trio that would love to keep their fees artificially high.
- jonknee 14y ago
  There are plenty of costs though, operating global real time processing networks is not free.
- vaksel 14y ago
  there are actually a ton of costs for them. They have to pay for infrastructure, they have to pay for customer support, they have to pay for fraudulent transactions and on and on. I think most credit card companies have something like 10%-15% ROI
  - armen52 14y ago
    Their fraud costs are not what you make them seem. The credit card companies do not take on the risk for fraud most of the time. They push that risk onto the merchants. This is why large e-commerce companies have giant fraud departments trying to prevent fraudulent orders and charges on their site; because when they occur, they generally just eat the loss.
    - Aleran 14y ago
      Actually the merchant is only liable for the loss if they did not follow all of the rules and regulations for processing the credit card. From wikipedia (http://en.wikipedia.org/wiki/Credit_card_fraud#Merchants http://en.wikipedia.org/wiki/Credit_card_fraud#Merchants): "The liability for the fraud is determined by the details of the transaction. If the merchant retrieved all the necessary pieces of information and followed all of the rules and regulations the financial institution would bear the liability for the fraud. If the merchant did not get all of the necessary information they would be required to return the funds to the financial institution. This is all determined through the credit card processory." From what I have seen, it is very common for the merchant to be liable for losses on a card not present transaction (e.g. online retail) but the credit card company stomaches the losses for a card present transaction. I suspect that online merchants could reduce their liability by implementing things like Verified by Visa but choose not to because it causes them to lose too many legitimate sales.
- Firehed 14y ago
  The networks get very little (IIRC a small flat fee per transaction on the order of 5 to 10 cents, but I don't have our pricing in front of me and it's some of the most opaque pricing you'll ever see) - most of interchange goes to the issuing bank. Blame the banks issuing credit cards for the high rates, not Visa and MC (both AmEx and Discover are, effectively, their own issuing banks - so go ahead and give them their fair share of the blame)
  - sjtgraham 14y ago
    Interchange goes to Visa, MasterCard, et al not the issuing bank. This is their vig.
    - Firehed 14y ago
      Sorry, no. Fees are paid to the issuing bank, acquiring bank, and network. The majority of it goes to the issuing bank, and that's the non-negotiable rate when you get a merchant account. That fee is known as the interchange fee. The processing fee is something you negotiate with your gateway and/or acquiring bank. I work in the industry; it's my job to know how this works. Here is an example from Wikipedia (bear in mind the amounts are fictitious but relatively accurate): http://en.wikipedia.org/wiki/File:Gao-report-on-interchange.gif http://en.wikipedia.org/wiki/File:Gao-report-on-interchange....
      - sjtgraham 14y ago
        It's great to know that you work in the industry, but it's irrelevant; argumentum ad verecundiam is a logical fallacy and only serves to demean your argument. To address your point, I understand interchange as being set and collected by the card network, and is non-negotiable. Anything off the top is left for the banks to keep for themselves, e.g. the plus in "interchange plus" pricing). Another example assume a hypothetical interchange of 1.5% and a merchant that has a merchant account that costs 3.5% + 30¢ (gateway) per transaction. In this case the card network takes 1.5%, the gateway 30¢, and the banks 2%. Is this not how it works? It would be nice if you could cite something (not trying to be an ass in case it reads that way :).
rexreed 14y ago
2) Much of it goes to the credit card interchanges (Visa / MC / Amex / Discover). Those are the folks that end up with the bulk of all these fees. Processors are middle-men that make a surcharge on those rates. Many "traditional" merchants offer interchange-plus rates now. As for 1), the emergence of mobile devices have really enabled this to happen. Square is really useful in the mobile environment. Prior to that, it was Internet merchants and traditional POS systems.
vaksel 14y ago
because when you go up and up the ladder, eventually you end up with 5-6 huge companies that control everything...not too surprising when the companies end up with similar pricing. I mean take credit cards for example. You have Visa and Mastercard with the majority of the market. Then you have American Express and Discover that have a tiny portion. That's it. And that's more or less worldwide. You'd think since the coming of the internet, we'd have at least some competition in this space. Just imagine how much money there is, in join Mastercard/Visa as a top 3 credit card. Square is a little lower down the chain, so the main thing they are giving here is passing through their huge savings down the pipeline. But even then it's not 100%. Their basic pricing is 2.75%. So essentially you need to sell $10,000 worth of stuff before you start profiting off the $275/mo...and you only have until $20,000 before you go up to the regular 2.75% pricing. And 2.75% is pretty high...for credit card processing.
gsibble 14y ago
Hi tibbon! To answer 1: Almost all of the fee structure goes to players much higher up the chain than Square. The networks take a chunk, but in fact most of the fee goes to the originating bank (the bank that issued the card). This is a major source of income for most banks these days and can generally be arbitrarily set by them since merchants not only have no other options except cash, but also cannot tell what their interchange fee would be prior to accepting the charge (except with a flat rate system like Square). So, because processors (Square) do not control the rates, there is no way for entrants to create any real competition around them. Not to mention that 2.75% is actually kind of high as an overall average and that the rumor is that Square actually operates these fees at a loss currently. Now, as for 2: As I said above, most of the fees go to the bank that issued the card (1.5-2.0%), another part goes to the network (VISA/MC), and the rest to the processor (Square). This is indeed HUGE money. It is literally hundreds of billions of dollars of revenue and profit controlled by a handful of banks. A high-ranking employee at a major US bank once told me that if you break down their corporate profits by division, interchange fees alone account for a significant portion of the entire bank's profits! So, suffice it to say, if we (the entrepreneurial world) can figure out how to create an interchange free system, its inventors could possibly be some of the wealthiest people in history. I happen to have a strong business plan along these lines and would love to share/discuss it with anyone interested. Let me know! edit: typo
- tibbon 14y ago
  Please do get in touch. My HN username @ gmail
- notregistering 14y ago
  I am interested in hearing what you have to discuss.
  - gsibble 14y ago
    Cool. You can reach me at my username at gmail.com.
- Unoeufisenough 14y ago
notatoad 14y ago
2-3% is over-estimating things. Online retailers pay that much, anybody charging credit cards at a physical location should be paying more like 1.75% in fees.
- nkurz 14y ago
  I take credit cards at a physical location for a physical product, and think I have good rates. We do $10-$20K per month, and averaged across all cards and including all fees we pay about 2.6%. I've checked with FeeFighters and others, and have never seen a legitimate quote as low as you suggest. I don't know if the savings are enough to cause us to switch (we use Square as a backup), but I think that for certain merchants this new offer is the best rate around. If you speak from experience and are currently paying less than 2% total fees in the US by some other means, please tell me how you are doing it!
  - notatoad 14y ago
    I'm not currently paying less than 2.6%, because i deal exclusively with online transactions. All i know is that most of my clients who handle offline transactions through another provider are shocked at paying over 2% when they start collecting money online. and my experience is in Canada, not the US, but in general our rates are slightly worse here. Your rates might be high because your volume is pretty low.
    - nkurz 14y ago
      Perhaps Canada actually has better rates than the US, but my general experience has been that people who say they are paying less than 2% aren't actually looking closely at their bill. My guess is that your clients are wrong, and are quoting the best-case advertised rate they signed up for, rather then the actual all-included cost they pay. But maybe they could get that low if their average transaction is high enough and they are in an extremely safe industry?

by tibbon 14y ago

bgentry 14y ago

There are virtually no fixed costs to actually performing the transactions. The fees are levied by the not-so-competitive Visa/Mastercard/AMEX trio that would love to keep their fees artificially high.

jonknee 14y ago
There are plenty of costs though, operating global real time processing networks is not free.
vaksel 14y ago
there are actually a ton of costs for them. They have to pay for infrastructure, they have to pay for customer support, they have to pay for fraudulent transactions and on and on. I think most credit card companies have something like 10%-15% ROI
- armen52 14y ago
  Their fraud costs are not what you make them seem. The credit card companies do not take on the risk for fraud most of the time. They push that risk onto the merchants. This is why large e-commerce companies have giant fraud departments trying to prevent fraudulent orders and charges on their site; because when they occur, they generally just eat the loss.
  - Aleran 14y ago
    Actually the merchant is only liable for the loss if they did not follow all of the rules and regulations for processing the credit card. From wikipedia (http://en.wikipedia.org/wiki/Credit_card_fraud#Merchants http://en.wikipedia.org/wiki/Credit_card_fraud#Merchants): "The liability for the fraud is determined by the details of the transaction. If the merchant retrieved all the necessary pieces of information and followed all of the rules and regulations the financial institution would bear the liability for the fraud. If the merchant did not get all of the necessary information they would be required to return the funds to the financial institution. This is all determined through the credit card processory." From what I have seen, it is very common for the merchant to be liable for losses on a card not present transaction (e.g. online retail) but the credit card company stomaches the losses for a card present transaction. I suspect that online merchants could reduce their liability by implementing things like Verified by Visa but choose not to because it causes them to lose too many legitimate sales.
Firehed 14y ago
The networks get very little (IIRC a small flat fee per transaction on the order of 5 to 10 cents, but I don't have our pricing in front of me and it's some of the most opaque pricing you'll ever see) - most of interchange goes to the issuing bank. Blame the banks issuing credit cards for the high rates, not Visa and MC (both AmEx and Discover are, effectively, their own issuing banks - so go ahead and give them their fair share of the blame)
- sjtgraham 14y ago
  Interchange goes to Visa, MasterCard, et al not the issuing bank. This is their vig.
  - Firehed 14y ago
    Sorry, no. Fees are paid to the issuing bank, acquiring bank, and network. The majority of it goes to the issuing bank, and that's the non-negotiable rate when you get a merchant account. That fee is known as the interchange fee. The processing fee is something you negotiate with your gateway and/or acquiring bank. I work in the industry; it's my job to know how this works. Here is an example from Wikipedia (bear in mind the amounts are fictitious but relatively accurate): http://en.wikipedia.org/wiki/File:Gao-report-on-interchange.gif http://en.wikipedia.org/wiki/File:Gao-report-on-interchange....
    - sjtgraham 14y ago
      It's great to know that you work in the industry, but it's irrelevant; argumentum ad verecundiam is a logical fallacy and only serves to demean your argument. To address your point, I understand interchange as being set and collected by the card network, and is non-negotiable. Anything off the top is left for the banks to keep for themselves, e.g. the plus in "interchange plus" pricing). Another example assume a hypothetical interchange of 1.5% and a merchant that has a merchant account that costs 3.5% + 30¢ (gateway) per transaction. In this case the card network takes 1.5%, the gateway 30¢, and the banks 2%. Is this not how it works? It would be nice if you could cite something (not trying to be an ass in case it reads that way :).

rexreed 14y ago

2) Much of it goes to the credit card interchanges (Visa / MC / Amex / Discover). Those are the folks that end up with the bulk of all these fees. Processors are middle-men that make a surcharge on those rates. Many "traditional" merchants offer interchange-plus rates now. As for 1), the emergence of mobile devices have really enabled this to happen. Square is really useful in the mobile environment. Prior to that, it was Internet merchants and traditional POS systems.

vaksel 14y ago

because when you go up and up the ladder, eventually you end up with 5-6 huge companies that control everything...not too surprising when the companies end up with similar pricing. I mean take credit cards for example. You have Visa and Mastercard with the majority of the market. Then you have American Express and Discover that have a tiny portion. That's it. And that's more or less worldwide. You'd think since the coming of the internet, we'd have at least some competition in this space. Just imagine how much money there is, in join Mastercard/Visa as a top 3 credit card. Square is a little lower down the chain, so the main thing they are giving here is passing through their huge savings down the pipeline. But even then it's not 100%. Their basic pricing is 2.75%. So essentially you need to sell $10,000 worth of stuff before you start profiting off the $275/mo...and you only have until $20,000 before you go up to the regular 2.75% pricing. And 2.75% is pretty high...for credit card processing.

gsibble 14y ago

Hi tibbon! To answer 1: Almost all of the fee structure goes to players much higher up the chain than Square. The networks take a chunk, but in fact most of the fee goes to the originating bank (the bank that issued the card). This is a major source of income for most banks these days and can generally be arbitrarily set by them since merchants not only have no other options except cash, but also cannot tell what their interchange fee would be prior to accepting the charge (except with a flat rate system like Square). So, because processors (Square) do not control the rates, there is no way for entrants to create any real competition around them. Not to mention that 2.75% is actually kind of high as an overall average and that the rumor is that Square actually operates these fees at a loss currently. Now, as for 2: As I said above, most of the fees go to the bank that issued the card (1.5-2.0%), another part goes to the network (VISA/MC), and the rest to the processor (Square). This is indeed HUGE money. It is literally hundreds of billions of dollars of revenue and profit controlled by a handful of banks. A high-ranking employee at a major US bank once told me that if you break down their corporate profits by division, interchange fees alone account for a significant portion of the entire bank's profits! So, suffice it to say, if we (the entrepreneurial world) can figure out how to create an interchange free system, its inventors could possibly be some of the wealthiest people in history. I happen to have a strong business plan along these lines and would love to share/discuss it with anyone interested. Let me know! edit: typo

tibbon 14y ago
Please do get in touch. My HN username @ gmail
notregistering 14y ago
I am interested in hearing what you have to discuss.
- gsibble 14y ago
  Cool. You can reach me at my username at gmail.com.
Unoeufisenough 14y ago

notatoad 14y ago

2-3% is over-estimating things. Online retailers pay that much, anybody charging credit cards at a physical location should be paying more like 1.75% in fees.

nkurz 14y ago
I take credit cards at a physical location for a physical product, and think I have good rates. We do $10-$20K per month, and averaged across all cards and including all fees we pay about 2.6%. I've checked with FeeFighters and others, and have never seen a legitimate quote as low as you suggest. I don't know if the savings are enough to cause us to switch (we use Square as a backup), but I think that for certain merchants this new offer is the best rate around. If you speak from experience and are currently paying less than 2% total fees in the US by some other means, please tell me how you are doing it!
- notatoad 14y ago
  I'm not currently paying less than 2.6%, because i deal exclusively with online transactions. All i know is that most of my clients who handle offline transactions through another provider are shocked at paying over 2% when they start collecting money online. and my experience is in Canada, not the US, but in general our rates are slightly worse here. Your rates might be high because your volume is pretty low.
  - nkurz 14y ago
    Perhaps Canada actually has better rates than the US, but my general experience has been that people who say they are paying less than 2% aren't actually looking closely at their bill. My guess is that your clients are wrong, and are quoting the best-case advertised rate they signed up for, rather then the actual all-included cost they pay. But maybe they could get that low if their average transaction is high enough and they are in an extremely safe industry?