Why Credit Card Companies Are Scared Of Change

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.

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/

This is a nice PR piece for Square.

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.

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.

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... .)

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... .) Once those are overcome, it's just a matter of time before cards are thought of just like casette tapes.

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.

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.