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> In the third quarter of 2012, we signed an agreement to process credit and debit card payment transactions for all Starbucks-owned stores in the United States. The agreement was amended in August 2015 to eliminate the exclusivity provision in order to permit Starbucks to begin transitioning to another payment processor starting October 1, 2015. Under the amendment, Starbucks also agreed to pay increased processing rates to us for as long as they continue to process transactions with us. We anticipate that Starbucks will transition to another payment processor and will cease using our payment processing services prior to the scheduled expiration of the agreement in the third quarter of 2016, and, in any event, we do not intend to renew it when it expires.

In addition to the $150 million loss in 2014, looks like the revenue side doesn't look too good either. From their operating data,

Total revenue = $707.8 million

Starbucks revenue = $123 million

So they would likely lose > 17% revenue very soon.

Starbucks is broken out explicitly - Revenue for SBUX $123 million and it cost them $150 million to process, so they were losing $27 million / year on the Starbucks partnership. The rest of their business is quite different, so losing that partnership makes them stronger, not weaker, as you are implying.

> So they would likely lose > 17% revenue very soon.

It looks like they loose money on every single Starbucks transaction. Sounds like a good thing.

This pattern, ie. a large loss making enterprise client seems very common. I wonder if its because companies like Starbucks can regularly out negotiate small companies, or if it ends up being a fair trade for the brand value of having them as a client.

At this stage it's not about profit...it's about volume. They need to become so big that their scale takes care of profit problems. So it's terrible that they're losing such a huge customer.

Volume isn't the only thing in CC realm. Visa, MC, AMEX charge a pass-through rate. If the deal with Starbucks didn't push the pass through rate and charged south of 10 basis points, then they're not making money but still have to spend money on infrastructure.

Companies that act as gateways are not making large chunks of cash so every basis point matter.

edit: spelling, structure

Sure, but you need to burn until you become part of the oligopoly of Visa, AMEX, Mastercard, Discover. Square is offering cheaper transaction rates through better technology - that's the only reason a company would switch to them over the big 4 in the first place. They'll bring down rates for everyone, but at some point they need to find their place as one of the big 5, at which point equilibrium rates will be high enough for them to turn a profit. This means they need large accounts, they need volume, they need credibility, they need to own a big chunk of infrastructure. Even if they're losing money on it now.

If I'm a potential customer and I see Square losing its Starbucks account and 17% of its revenue I'm going to be somewhat wary of its ability to exist in 3-5 years, and then I'll have to incur costs of switching back to some other payments processor.

>until you become part of the oligopoly of Visa, AMEX, Mastercard, Discover

I thought their competitors were First Data, Vantiv, Total Systems Services, Global Payments, and Heartland Payments Systems, etc. Does Square issue cards/ credit? It's not clear everybody in this discussion has the same facts.

Edit: Replaced pronoun with proper.

Its way, way more complex then that. Please see my answer above. Square's competition is stripe and paypal...

And all the new "mobile" payment platforms coming out. Companies you mentioned are HUGE and some are subsidiaries of larger banks.

All of the companies I mentioned are not subsidiaries, they are publicly traded, independent companies. A few of them were spun out of banks at one time (e.g. Vantiv came from Fifth Third). In your other comment you say that First Data is part of Bank of America, which is completely wrong.

First Data just started trading today under the ticker NYSE:FDC where they were taken private by KKR in 2007. Prior to that they were spun out of AMEX back in 1992.[0]

>Its way, way more complex then that

Please don't do this. I worked in the industry for 5 years and have quite a firm grasp of it (it's only been 8 years since, and the industry hasn't changed much).


Looking into it further, I think I made a mistake. It was my belief that PaymentTech and BAMS are corps but instead they are "alliances". First-Data owns x% of the BAMS alliance which is different then BAMS of BoA fame.

Also, I had no idea that FirstData went public, in my dealings with them, I always delt with Bank of America Merchant Services, which acted as if First Data was their subsidiary. This opinion came from reading our BAMS contract.

Coming from the merchant's side of things, and dealing with this for over a decade, it "feels" more complicated. However, considering you were on the inside, your first-person version is more accurate.

Hope you didn't take offense.

I'm going to attempt to answer you in the best way that I can, however, I would like to post a disclaimer: Credit Card processing is an incredibly shady/grey business with several companies fighting for a fraction of a basis point per transactions.

The big 4, as you put it, have very little to do with the actual processing of credit cards. They are the "finish" line of a consumers transaction. In between a consumer and the credit card company, there will be a terminal/pos vendor, a data vendor, a gateway, and a processor. Every single one of those folks takes a cut. In addition, all of those companies are part of larger conglomerates.

So, if you go to your favorite burger/salad/sushi/coffee place, their system will take your credit card, will have another company (like Datawire) create a secure connection to a gateway (lets say First Data) and then hand it off to the processor (BAMS), who will then process your credit cards but not fund them. Once the batch is processed, then the credit card companies will fund your account.

So Square is trying to "disrupt" this business, and create their own connection. However, it's not in AMEX/VISA/MC/Discover's best interests to deal with them. In addition, BAMS (Bank of America Merchant Services), Payment Tech (Chase), and AMEX run processors as a subsidiary, and then gateways (First Data) are parts of their conglomerate. First Data is part of BAMS, WorldPay is joined NCR/VISA/MC and VisaWorld is Visa/MC/Discover.

This is outside the "large" players like Heartland that process a tremendous amount of information.

Square is successful because the "pie" is huge, and growing every day. More and more people are using mobile payment and plastic vs Cash. With increased competition, basis points are king. ONE basis points on 3,000,000,000 in transactions is only 300,000. So for a company to bring in 1,000,000 they would have to essentially process a trillion dollars based on a single basis point commission.

I can go on and on about this giving you exact figures and numbers but I hope I've earned enough "trust" for you to believe me that sometimes letting go of 17% of your total revenue will actually bring you more cash.

Think of it like a bar that fired the bartender who gave away all those drinks. Yes, less people and less money in the drawer but more profit =D

Good summary, but you are confusing First Data's role - First Data is a processor, not just a Gateway, and is actually the processor for BAMS, Wells Fargo, and many other banks. (http://digitaltransactions.net/news/story/First-Data_s-Allia...)

Thanks for sharing that article. The CCP world is so convoluted that when I start thinking "I got it", I realize the rabbit hole keeps going.

Here are two articles for anyone who is interested in learning more:

[0] : https://www.quora.com/What-is-the-difference-between-a-payme...

[1] : http://www.chetu.com/blogs/finance-2/choosing-between-paymen...

Their competitors are public and are floating in money but aren't investing in technology to lower transaction costs. Ask yourself why. Its not like their competitors don't have money, people, or a desire for profit. Or "the market" isn't interested in middlemen spending money they have (or don't have) to improve their tech, so why would joining "the market" be part of the strategy for a company trying to advance transaction tech? The market doesn't want them to do what they've been doing. So they'll have to pivot, essentially. Into... what? And the what doesn't matter because whatever it is, its not their secret sauce.

Their transaction costs are lower than their competitors because they're losing money. I'm sure AMEX would have cheap transaction costs if they were willing to lose staggering amounts of money. I could form a startup to sell gasoline for $1/gallon over the internet. Sure I'd lose tons of money, but look how cheap my gas is compared to BP. Well of course BP is earning a profit whereas I'm losing money on every gallon, but I'm sure after the IPO...

They have some traction in very discretionary consumer spending. Not the best place to be in the start of a recession. And public policy has been, is, and will be, to concentrate as much money as possible at the top while draining it out of the bottom. Why would you open a new Ferrari dealership in Detroit? Or rephrased the digital money of the future for farmers markets is EBT "food stamps" cards, not an iphone app. That discretionary money being spent at the coffee shops and farmers markets is "supposed to" by policy all go to .edu, bank mortgages, and health care. The economy is trying to destroy the sector they are trying to middleman off of, good luck with that long term. They're sailing the wrong direction at the customer level.

Speaking of competitors... well why even comment in detail about each. The problem with payment middlemen isn't so much that they're there as a class, its that there's so many identical ones. In my alternate life as a volunteer treasurer for a non-profit everyone wanted digital donation/payment processing, however everyone wanted a different one, and I am SO not going to jump thru those hoops, so its cash and checks only. Its like insisting I open a bank account at every branch in the metropolis, good luck with that. Maybe we need a middleman for the middleman to manage the middlemen.

I hate to imply history is repeating but this is pretty much Flooz again, isn't it? Those who don't know history are doomed to repeat it?

Your comment is solid but it "feels" jaded. The credit card fee "pie" is HUGE. There is room for square and many other alternatives.

As you've said, there is a middle man of the middle man who manages the middle man. That's not Square's bread and butter. They're going after the low hanging fruit: small businesses, food trucks, flee market sellers, etc.

They can't compete in the POS world but they can get theirs.

However, you are foreshadowing something else, in my opinion: Square is the small fish nipping at the large pie while the big fish are swimming away from Sharks. If Square attempts to grow too quickly or expand too fast, they'll get swallowed up. They won't be bought, just forced out of business.

I think they can have value, but in 10 years - slow and steady.

$-1/transaction * 1,000,000 transactions vs $-1/transaction * 1,000,000,000

At which stage? They're going public, they're not a startup anymore. If they're still high growth they'd be going after another funding round instead of an IPO.

At the stage of still being unprofitable. Just like Twitter and Amazon, which are also both public companies.

Filing for an IPO does not mean you're slowing growth...it's just an alternate form of fundraising that allows a different mix of investors to join in on the fun.

Twitter is pretty much a counter example. They have a terrible time being profitable despite their size and their stock is getting hammered for it.

Amazon is a different beast because they live at the razor's edge of profitability and have for years. Square is not close not to mention they're competing with entrenched competitors.

Historically that was not true at all. This cycle it has been true, but I'm not sure if that is because of increase compliance cost post Sarbox, increased risk of activist investors choking off growth, or increased availability of private capital.

"Total revenue = $707.8 million"

Somehow that seems wrong to me... Is Square counting money-through-the-system as revenue? Is that what it is? To me it feels like their revenue would be their cut of the money that runs through the system, so some small percentage of the $707m. Is this a common thing to do, in this area?

$707m is their cut of the money that they process. I think it was approximately $24bn of money that went through the system.

Ah, excellent, thank you!

No, that has to be their cut. If they're taking 3% then it's absolutely conceivable that they are processing $23 Billion. Visa and MasterCard process multiple trillions of dollars a year.

Coming from a world that deals with credit card processors, their deal with Starbucks could have been a sweetheart deal and causing some of their losses. If they're loosing money on the deal, they could potentially reduce their loss.

Credit card gateways, like square, take a fraction of the transaction during processing. If their deal did not include the pass through rates of Amex, Visa, MC and those companies raised rates, that would be coming out of Squares pocket.

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