

Why Credit Card Companies Are Scared Of Change - mvs
http://techcrunch.com/2011/08/22/a-woman-a-cupcake-a-bank-and-a-square-why-credit-card-companies-are-scared-of-change/

======
tibbon
Several years ago I was helping a small community theatre get off the ground.
One of the things we needed to figure out was payment processing. We got tons
of salespeople and junk-mail about it.

I consider myself a smart person, but figuring out the multi-variable equation
in figuring out which processing service would be the best was nearly
impossible. They wanted to know a _ton_ of information about our business,
which hadn't even opened its doors yet.

\- What would our average transaction total? We had no idea. We hadn't figured
out ticket prices yet, and didn't know how many the average person would buy.

\- How many debit vs credit transactions would we have? How many would use a
pin, how many would be manual swipe, how many would be over the phone? Again,
we had some projections, but it really wasn't something we could accurately
say in the short or long term.

They wanted to lock us in, have us buy a machine, had various types of
statement fees and monthly fees, transaction fees, overage fees, fees for
using too few transactions, higher fees for Amex vs Visa, etc.

Simply put, figuring out the exact % of our incoming money that this would
take was impossible. And they all seemed like companies that I didn't feel I
could trust the customer service. Frankly, it all felt like a scam of some
sort. The application process to each was also very in depth.

In contrast, I signed up for a Square. I didn't know what I'd use it for
specifically, but it turns out that I joined a few bands right after, and it
turned out to be massively useful. "I'd totally buy your CD, but all I have is
a card." - no longer a problem. Some of the bars we played didn't even accept
cards, and we did. Application process was easy, and understanding what it
could cost me was super easy.

Why in the world other credit card processors can't do similar just seems to
equate to nothing but greed on many levels. The fixed cost to them of doing a
digital transaction is almost zero, yet they act like they have a fixed floor
on it that can't be bypassed. Where this money goes, I'll never know.

~~~
brendino
Complex pricing schemes tend to be a sign of a monopoly or oligopoly. The
sellers of the market use these complex pricing schemes to skim off as much
consumer surplus as possible.

In my opinion, the best way to disrupt an oligopoly or monopoly is to create a
product that makes the original offering irrelevant. Square is doing just that
- making the credit card processing industry irrelevant with simple technology
and pricing.

------
AretNCarlsen
If I were the Square founders, and I was expecting conventional credit card
processors to go on the offensive, I might offer them a red herring: a simple
technical limitation, something on which the competition would focus
exclusively. The trick is that I would choose this technical limitation such
that I could suddenly correct it at a later date, leaving my competitors
without any ammo.

If I were feeling _really_ clever, I might choose this herring such that my
initial costs were also reduced. For example, I could make my initial card
scanner _so_ simple that it doesn't even require a watch battery or Hijack-
style power[1]. Of course, I couldn't encrypt data passing through the jack
... until I decide to send out a new version of the card scanner with an extra
$3 worth of microcontrollers and batteries inside. (Wait for it...)

P.S. - I doubt very much that I would have thought of that ahead of time. But,
maybe the Square guys are smarter.

[1] <http://www.eecs.umich.edu/~prabal/projects/hijack/>

------
jaredmck
This is a nice PR piece for Square.

------
rdoherty
While we're on the topic of processing credit card payments, anyone have
recommendations for processing monthly subscriptions online? (Merchant account
and gateway). Similar to this article, there are many hidden and weird pricing
schemes.

~~~
waterside81
I know it gets a lot of stick, but I'm a fan of PayPal. Yeah, once in a while,
you hear horror stories, but by & large, I've had only positive experiences.
Their site sucks but their API is responsive, predictable, reliable &
generally well documented.

------
savrajsingh
I was at a farmers market on Thursday. Can I get a commission for signing up
square users? Almost all were cash only and could totally benefit from square.

------
thinkcomp
This article is misleading in that it depicts Square as being cheaper than
most merchant accounts. If you sell one cupcake a month then I suppose it is,
but for most merchants Square isn't even an option. It's far more expensive
and there are other limitations that reporters tend to gloss over. (See
[http://www.quora.com/Aaron-Greenspan/Of-Round-Pegs-and-
Squar...](http://www.quora.com/Aaron-Greenspan/Of-Round-Pegs-and-Squares-
Holes) .)

Credit card companies are scared of change because change could easily put
them out of business. They're protected, not by a good product or world-class
service, but by lobbyists and other artificial barriers to entry. (See
[http://www.quora.com/Aaron-Greenspan/Held-Hostage-How-the-
Ba...](http://www.quora.com/Aaron-Greenspan/Held-Hostage-How-the-Banking-
Sector-Has-Distorted-Financial-Regulation-and-Destroyed-Technological-
Progress) .) Once those are overcome, it's just a matter of time before cards
are thought of just like casette tapes.

------
larrys
I think it's important to remember with any service like this the deal today
is not the deal in 6 mos. or a year. And the trouble is that switching your
processing (because of the complicated nature) is not easy. That being said it
obviously makes sense to go with square at the current pricing. But the rate
will change and there will be extra charges once they get established most
likely.

~~~
ars
Why do you think that? %2.75 is a perfectly sustainable rate for a credit card
processor.

------
pitdesi
I think Square is a fantastic company and they have a very disruptive product,
but this is a puff piece. Using a $3 average transaction size plays to its
strengths. Square is in fact cheaper for anyone with a small transaction size.
However, it isn't going to be a cheaper option (than a reasonable merchant
account) if you're average transaction size is over $17 or so - use this
calculator to figure it out... <http://feefighters.com/square-calculator>

That being said, it is very easy to get setup on square and that is a huge
plus point. We at <http://feefighters.com> do our best to make it easy to get
setup with a merchant account but still recognize that Square makes sense for
some merchants (and thus show it in bids and refer a lot of business their way
when it makes sense).

EDIT: Earlier had the inflection point at 10, it's actually higher if you
don't include the cost of the iPhone service... There is no easy number, you
have to play around because of the number of variables. Thanks for the
correction dhbanes. Interestingly enough, Squares average transaction size is
MUCH larger (close to $80 last time I checked). They have a lot of contractors
that use it for 000's of dollars.

Disclosure: we are partners with Square but also with many credit card
processors. Our system is completely impartial. We think Square is wicked
awesome.

~~~
dhbanes
_...However, it isn't going to be a cheaper option (than a reasonable merchant
account) if you're average transaction size is over $10 or so..._

Using your calculator and a total monthly volume of $4,000 (the default
setting), there isn't a single average transaction size that makes Square more
expensive than a merchant account - all the way up to $10k.

Even when increasing total monthly volume to $10,000, I have to raise the
average transaction amount to $50 before the merchant account becomes $20
cheaper per month.

