How a Trendy Company Like Square Struggles to Stay on Top

Launched in 2009, Square, Inc. and their mobile credit card readers, began to take over the world of small business like wildfire. With their trendy mobile technology, sleek marketing campaigns and socially prominent CEO, Jack Dorsey, it seemed as if the sky was the limit for the new startup.

So how is it now, just five years later, after multiple new product releases and innovations, The Wall Street Journal reports Square’s cash flow is shrinking with losses at $100 million in 2013? Not to mention its rumored talks about selling to giants like Apple, Google and PayPal …

Without understanding the economics of Square’s business, it’s easy to be perplexed by its struggles. I mean, it seems to be all the rage, right? How could they possibly be losing money? A basic analysis of Square’s business model can easily answer these troubling questions.

First, let’s talk about their lack of profitability. Forbes writer Steven Bertoni articulates this issue well in his article Why Square Needs to Sell Itself and Do it Quickly .  In his article, Bertoni Illustrates just how thin Square’s profit margins really are, …Square takes a 2.75% cut of purchases–but keeps very little of that (the Journal put Square’s take at about 1/5 of the total). Say you buy $100 worth of lattes with your Visa at the local coffee joint–Square collects $2.75 but must turn around and give Visa $2.20 of that fee. That leaves Square with a mere $0.55 to fund its entire operation–marketing, growth, sales, customer service, human resources, salaries, rent…). Ironically, the more payments Square currently processes, the more money the company loses,” Bertoni writes. 

The answer to this conundrum is clear: Target businesses with a lower volume of transactions and higher average ticket prices. Sounds simple enough, just shift the marketing plan a bit, right? Wrong. Square’s whole business concept is targeting micro-merchants and individuals. As an aggregator, they don’t offer the flexibility in rates that a traditional processing company would, making them financially less attractive to larger businesses. This brings us to our next point…

When Square hit the market its main selling point was the convenient mobile technology. It gave business owners a simple way to accept credit cards on their smartphones and tablets. They never claimed to compete based on their 2.75% swipe fee. Most business owners, educated about swipe fees, assumed the higher, set fee was the price they were paying for the convenience and mobility of the product. But Square is no longer the only convenient, cutting edge mobile solution in town.

Other more robust mobile iPad register products like NCR Silver or talech are not only offering businesses competitive rates and better security but also features like split payments, partial refunds and pre-authorizations for deposits as well as email marketing – things Square isn’t providing its customers.

Basically, Square’s technology now has major competition. Unfortunately for them, these new products, being sold by actual processors (not aggregators like Square) have the ability to offer competitive rates as well. Square, on the other hand, with its already thin profit margins, not so much.

And last, but certainly not least, how about Security? At its inception, Square’s credit card reader (also known as the dongle) was highly criticized by Former Verifone CEO Doug Bergeron for its ”gaping security holes.”

Now whether or not Square has yet to step up the security of its card readers is unclear, since the original version is debatable. But one thing is for sure – as Square is bleeding money it’s unlikely they will be able to distribute all new Chip & Pin compatible card readers to their customers come October 2015.

Effective October 2015, all businesses processing credit card cards on a non Chip & Pin (EMV) compatible card reader will take on the liability for credit card fraud per Visa and MasterCard regulations. Essentially, this means if a business isn’t using EMV technology and experiences a breach (like Target’s recent debacle) they have no protection and are liable for the losses.

These EMV card readers are much more technologically advanced, capable of reading the smart computer chips in smart cards, as opposed to the magnetic strips Americans use today and will undoubtedly cost more to manufacture. Square will have to say bye-bye to free card readers or continue to bleed money.

After the flash and excitement of Square’s great advertising wore off and other products hit the market, maybe their customers may be asking themselves, what was all the hype about?

We have been asking ourselves the same question…

About the Author

Rachida Essadiq, Director of Marketing at NTC Texas is a successful five year marketing veteran, running events and campaigns for large to  small enterprises and non-profits.  She specializes in blogging, social media, branding/ identity and search engine optimization, striving to provide NTC Texas customers and fans with entertaining and valuable educational resources to find success in all areas of their businesses.