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.
It looks like they loose money on every single Starbucks transaction. Sounds like a good thing.
Companies that act as gateways are not making large chunks of cash so every basis point matter.
edit: spelling, structure
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.
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.
And all the new "mobile" payment platforms coming out. Companies you mentioned are HUGE and some are subsidiaries of larger banks.
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.
>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).
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.
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
Here are two articles for anyone who is interested in learning more:
 : https://www.quora.com/What-is-the-difference-between-a-payme...
 : http://www.chetu.com/blogs/finance-2/choosing-between-paymen...
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?
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.
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.
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.
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?
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.