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That'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 recei

by gsibble 14y ago

That'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 ago
I 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.
- gsibble 14y ago
  I agree that may have been a good strategy (and may have been their original strategy) but with $100m in cash from VISA, it's very unlikely they will launch a competing network. Also, all of Square's payments including digital ones still get processed over VISA/MC/AMEX and still have interchange. Getting rid of the card itself does no good to lower fees. Prepaid accounts would definitely work though. Again, Square probably isn't interested (and may be prohibited) from competing with VISA/MC though.
  - LyndsySimon 14y ago
    > but with $100m in cash from VISA, I was unaware of this; that does make a significant difference.
panabee 14y ago
Excellent analysis. Agreed that valuing Square as a credit card processor makes for a very frothy, perhaps unjustifiable, valuation. My belief, however, is that some investors are betting on Square's potential as much more than a credit card processor -- really, more of a data and payments platform. If Square can own the marketshare of payment transactions happening offline, then other monetization opportunities appear and the credit card processing is more of a loss leader or infrastructure investment (e.g., Amazon investing in warehouses and supply chain management). Some of the other opportunities include: coupons (they know exactly what you buy and can tailor deals); analytics (e.g., household good purchases dropped by 25% in San Francisco last month); recommendation engine (I ate at these restaurants last month, this week Square recommends these); and a replacement network for credit cards, though this seems unlikely in the near term because of the difficulty factor and the fact some big banks are investors in Square. While there are assuredly other ideas, and while some of these may never yield profits, the macro point is that investors are betting that Square can monetize payments data and payment identity in new ways -- if it can become the new funnel through which everyone pays businesses in the offline world.

by gsibble 14y ago

LyndsySimon 14y ago

I 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.

gsibble 14y ago
I agree that may have been a good strategy (and may have been their original strategy) but with $100m in cash from VISA, it's very unlikely they will launch a competing network. Also, all of Square's payments including digital ones still get processed over VISA/MC/AMEX and still have interchange. Getting rid of the card itself does no good to lower fees. Prepaid accounts would definitely work though. Again, Square probably isn't interested (and may be prohibited) from competing with VISA/MC though.
- LyndsySimon 14y ago
  > but with $100m in cash from VISA, I was unaware of this; that does make a significant difference.

panabee 14y ago

Excellent analysis. Agreed that valuing Square as a credit card processor makes for a very frothy, perhaps unjustifiable, valuation. My belief, however, is that some investors are betting on Square's potential as much more than a credit card processor -- really, more of a data and payments platform. If Square can own the marketshare of payment transactions happening offline, then other monetization opportunities appear and the credit card processing is more of a loss leader or infrastructure investment (e.g., Amazon investing in warehouses and supply chain management). Some of the other opportunities include: coupons (they know exactly what you buy and can tailor deals); analytics (e.g., household good purchases dropped by 25% in San Francisco last month); recommendation engine (I ate at these restaurants last month, this week Square recommends these); and a replacement network for credit cards, though this seems unlikely in the near term because of the difficulty factor and the fact some big banks are investors in Square. While there are assuredly other ideas, and while some of these may never yield profits, the macro point is that investors are betting that Square can monetize payments data and payment identity in new ways -- if it can become the new funnel through which everyone pays businesses in the offline world.