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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
by 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 agoPlease do get in touch. My HN username @ gmail
- notregistering 14y agoI am interested in hearing what you have to discuss.
- gsibble 14y agoCool. You can reach me at my username at gmail.com.
- Unoeufisenough 14y agoActually most (depending on the card, the great majority) of those fees end up going right back to the cardholder. Those fees are what pays for all those airline points, cash-back discounts, guarantees and liability protections, purchase insurance etc. Another way of thinking about credit cards is a way that a large groups of customers are able to band together to collectively demand discounts, rewards and other valuable protections from merchants in exchange for their business. The banks compete amongst themselves to win your business as a cardholder by trying to negotiate higher discounts from merchants. (the fees paid by merchants are called MDR or merchant discount rate).
- tibbon 14y agoVery interesting! Perhaps I'm a minority here, but I actually would more prefer just simple cards that are used for payment than a reward-based card (which is why i have a very basic debit card from a credit union). All the airline points and discounts just strike me as marketing more than a real benefit. US Airlines keeps reminding me of the number of points I've forfeited by not using them enough... as if that will make me want to use them more and still not get free flights.
- gsibble 14y agoCompletely agree. But since VISA/MC control the network, even your basic debit card from a credit union costs merchants 2-3%. What is needed is an entirely new network....
- Dobbs 14y agoAt least for Airlines it seems to be more about status than the flights. Having a premium membership on United for example lets you use expedited lines for checking luggage, security and boarding. In addition you get free checked luggage, better customer support and are more likely to get upgraded to first class and are all around treated better by United.
- majormajor 14y agoI've never been into getting mileage or whatever, but rewards cards can be very handy. I basically get 1% off of everything I buy -- I've got a card through Amex with no annual fee that simply sends me a $25 gift card in the mail every time I spend $2500. It's basically effortless -- all I have to do is pay with two cards every once in a while after getting the gift card and buying something for more than $25. If there are people willing to give you free money you might as well take it. :) Amex has also consistently given me absolutely fantastic customer service. I'm really not in any hurry for them to be disrupted...
- dangrossman 14y agoI'd be surprised to hear they're operating at a loss in terms of the fees alone. Most of us are used to seeing fees quoted by PayPal, Stripe, Amazon and other processors for internet transactions. Card-not-present interchange fees are higher than card-present fees because of the higher risk. Square should be getting much better rates from their processors since they're handling in-person transactions.
- gsibble 14y agoThat's just the news I was hearing from people who have seen their financials. Let's say they aren't operating at a loss though. The processor typically receives 25-50 basis points on a transaction (0.25-0.5%). Let's assume Square is receiving 0.5% and generating revenue from their transactions. At $5B/year in processing volume, that means that Square's revenue is 0.005 * $5B = $25,000,000. $25,000,000 in revenue for a company worth $1B+? That's an extremely high valuation (40x revenue or more). And that's before figuring in all of Square's costs. Basically, all of the people who look at the numbers don't see how Square will actually become a highly profitable company in the near future.
- LyndsySimon 14y agoI have no insight into Square's management or financials, but if I were Jack Dorsey, I would find it reasonable to operate at a moderate loss for a fair amount of time, before launching my own exchange system that bypasses cards completely. Indeed, that seems to be the way they're going, what with _Pay with Square_ allowing for contactless, mobile-based payments. First they disrupt card processing for small merchants with low transaction rates that just murder traditional merchant account fees. Next, they get themselves involved on the consumer side of the transaction, abstracting away the physical card. What's next? Why not do away with the card entirely? How about _Pay with Square_ prepaid accounts? Allow users to fund their accounts via store-bought gift cards, or Dwolla, or perhaps even go crazy and accept Bitcoin. If they do that, then Square could give that 2.5% transaction fee back to the consumer, and profit from the interest on the float.
- 14y ago
- lisper 14y ago> would love to share/discuss it with anyone interested. Let me know! How? The "about" field in your profile is blank.
- gsibble 14y agoMy mistake! I've updated it and my email is my username at gmail.com.
- barmstrong 14y ago"figure out how to create an interchange free system" In my view, this is the potential of bitcoin...an open platform for payments that doesn't require trusted third parties. I don't think a single company (or even country) could pull it off, but a new open protocol (like SMTP but for payments) that runs on the internet could do it. I'm making a bet in this space (see profile).
- mleonhard 14y agoI'm working on an "SMTP for payments" protocol. I'd like to turn it into an RFC someday, after some problems are solved.