4 ms·

Can somebody ELI5 why Square wouldn't develop infrastructure to 'cut-out' Mastercard/Visa from this transaction? I mean, it seems like they could issue a credit

by Shinkei 12y ago

Can somebody ELI5 why Square wouldn't develop infrastructure to 'cut-out' Mastercard/Visa from this transaction? I mean, it seems like they could issue a credit card to begin competing with existing brands. I guess I just don't understand enough about these 'interchange' fees. So does the customer's bank or storefront's bank pay for this transfer? If this is infrastructure similar to broadband lines, are they monopolistic or could a competing company lease bandwidth on the same lines?

lsh123 12y ago
This diagram summarizes interchange fees really well: http://rortybomb.files.wordpress.com/2009/11/interchange_fee.jpg http://rortybomb.files.wordpress.com/2009/11/interchange_fee... While Square can develop the technical infrastructure, it might be tough from business perspective. This is a two-sided market and right now Square has penetration on the merchant side. The Square's P2P payments app might be an attempt to get into consumer market. It will be interesting to see how it will go. In the past similar attempts failed and the only recent example of a widely adopted 2-sided payments network is PayPal. Mobile is a very interesting space but nobody figured it out yet.
- johnrob 12y ago
  That diagram doesn't show how Visa/Mastercard make their money (unless they act as issuers or acquirers). Where is their cut?
  - lsh123 12y ago
    Right. Both issuer and acquirer banks pay per-transaction and/or annual fees to Visa/MC to participate in the network. These deals are highly custom but it is roughly 0.1% of payment volume.
jsonne 12y ago
This is essentially the approach Dwolla has taken versus other payment gateways. The issue is does Square want to be in the business of being a credit card company or a POS provider?
frandroid 12y ago
Because issuing a credit card would be a 20th century move. If they wanted to enter this market, they would have a Square client app with which users can pay Square merchants. There are tons of apps like this (I think I can count 5 in Toronto alone), with perhaps PayPal as the strongest contender... They made a push in this city as well recently. Most PayPal merchants are not brick and mortar, so really for them it's probably more of a merchant expansion strategy.
jof 12y ago
Recall that Visa and Chase are major investors. It's rather difficult to "eat their lunch" with them on your board.
- JonFish85 12y ago
  I work for a company in this space, and we are in the same boat (major credit card compan[y/ies] investors & on the board). And there is a lot of "we're sticking it to the credit card companies" talk here, which I find hilarious. We pose exactly 0 threat to the credit card industry. If we work out and do extraordinarily well--guess who makes a bunch of money? Credit card companies! If we go bust, we haven't hurt them in the least. It's funny how we trash-talk the credit cards. Credit card companies are going NOWHERE. If they ditch their plastic cards, that's one thing, but extending credit to people will be a business for a very, very long time. All of the mobile-payments companies (mine included) that I am aware of are still supporting credit cards--they may do fancy footwork to lower their own effective rates, and give some of that savings to their customers, but ultimately, credit card companies are still getting their cut.
imjk 12y ago
The mobile payments space - in its various forms - is extremely competitive. Everyone's gunning for market share right now including Square, Stripe, PayPal, Braintree, Venmo, Apple, Amazon, Google, merchant processors, the major credit card issuers and banks, etc. There's also multiple layers of credit card processing with various players intertwined with their own interests: http://smg-is714.blogspot.com/2011/11/payment-processing-financial-services.html http://smg-is714.blogspot.com/2011/11/payment-processing-fin.... Right now the fight is for market share. In theory, one of these parties could eventually begin a top-to-bottom integrated system - and that may very well be the end goal for some - but with the world's largest banks, technology companys, and even merchants having a stake at one level or another, it would be extremely hard to do. One could argue that Apple is best positioned to do this: http://www.businessinsider.com/chart-of-the-day-apple-has-600-million-accounts-blowing-away-every-other-company-2013-11 http://www.businessinsider.com/chart-of-the-day-apple-has-60... (btw, that's an old stat. Apple by last count had 800MM cc's on file).
pbreit 12y ago
It's a massive chicken & egg issue. Cutting out Visa/MC and offering lower payment processing costs ONLY benefits the merchant while Square would need to try to convince consumers to obtain its inferior payment cards. The other problem is that US cardholders are addicted to their rewards which the merchants are essentially funding. You're kind of stupid not to have a rewards card because you are basically subsidizing someone else's rewards and not partaking.

by Shinkei 12y ago

lsh123 12y ago

This diagram summarizes interchange fees really well: http://rortybomb.files.wordpress.com/2009/11/interchange_fee.jpg http://rortybomb.files.wordpress.com/2009/11/interchange_fee... While Square can develop the technical infrastructure, it might be tough from business perspective. This is a two-sided market and right now Square has penetration on the merchant side. The Square's P2P payments app might be an attempt to get into consumer market. It will be interesting to see how it will go. In the past similar attempts failed and the only recent example of a widely adopted 2-sided payments network is PayPal. Mobile is a very interesting space but nobody figured it out yet.

johnrob 12y ago
That diagram doesn't show how Visa/Mastercard make their money (unless they act as issuers or acquirers). Where is their cut?
- lsh123 12y ago
  Right. Both issuer and acquirer banks pay per-transaction and/or annual fees to Visa/MC to participate in the network. These deals are highly custom but it is roughly 0.1% of payment volume.

jsonne 12y ago

This is essentially the approach Dwolla has taken versus other payment gateways. The issue is does Square want to be in the business of being a credit card company or a POS provider?

frandroid 12y ago

Because issuing a credit card would be a 20th century move. If they wanted to enter this market, they would have a Square client app with which users can pay Square merchants. There are tons of apps like this (I think I can count 5 in Toronto alone), with perhaps PayPal as the strongest contender... They made a push in this city as well recently. Most PayPal merchants are not brick and mortar, so really for them it's probably more of a merchant expansion strategy.

jof 12y ago

Recall that Visa and Chase are major investors. It's rather difficult to "eat their lunch" with them on your board.

JonFish85 12y ago
I work for a company in this space, and we are in the same boat (major credit card compan[y/ies] investors & on the board). And there is a lot of "we're sticking it to the credit card companies" talk here, which I find hilarious. We pose exactly 0 threat to the credit card industry. If we work out and do extraordinarily well--guess who makes a bunch of money? Credit card companies! If we go bust, we haven't hurt them in the least. It's funny how we trash-talk the credit cards. Credit card companies are going NOWHERE. If they ditch their plastic cards, that's one thing, but extending credit to people will be a business for a very, very long time. All of the mobile-payments companies (mine included) that I am aware of are still supporting credit cards--they may do fancy footwork to lower their own effective rates, and give some of that savings to their customers, but ultimately, credit card companies are still getting their cut.

imjk 12y ago

The mobile payments space - in its various forms - is extremely competitive. Everyone's gunning for market share right now including Square, Stripe, PayPal, Braintree, Venmo, Apple, Amazon, Google, merchant processors, the major credit card issuers and banks, etc. There's also multiple layers of credit card processing with various players intertwined with their own interests: http://smg-is714.blogspot.com/2011/11/payment-processing-financial-services.html http://smg-is714.blogspot.com/2011/11/payment-processing-fin.... Right now the fight is for market share. In theory, one of these parties could eventually begin a top-to-bottom integrated system - and that may very well be the end goal for some - but with the world's largest banks, technology companys, and even merchants having a stake at one level or another, it would be extremely hard to do. One could argue that Apple is best positioned to do this: http://www.businessinsider.com/chart-of-the-day-apple-has-600-million-accounts-blowing-away-every-other-company-2013-11 http://www.businessinsider.com/chart-of-the-day-apple-has-60... (btw, that's an old stat. Apple by last count had 800MM cc's on file).

pbreit 12y ago

It's a massive chicken & egg issue. Cutting out Visa/MC and offering lower payment processing costs ONLY benefits the merchant while Square would need to try to convince consumers to obtain its inferior payment cards. The other problem is that US cardholders are addicted to their rewards which the merchants are essentially funding. You're kind of stupid not to have a rewards card because you are basically subsidizing someone else's rewards and not partaking.