Square Reveals Small but Sufficient Profit Margins for Card Processing
Have you ever wondered how much Square actually makes from its mobile credit card processing? Not as much as you probably think.
According to a recent interview with Motley Fool, Square’s transaction margins are relatively small, but the company has other sources of revenue that have proven to be lucrative.
Square charges a 2.75% transaction fee each time a card is run through one of its mobile processing devices. Square only gets a portion of that fee. Approximately 0.15% of each transaction goes to Visa or MasterCard, but a full 2% goes to the bank issuing the funds. That only leaves Square with a 0.6% profit margin.
While those numbers would typically disappoint investors, industry analysts Dylan Lewis and Sarah Priestley discussed the significance of Square’s other ventures, primarily Square Capital. With this program, small businesses are able to apply for loans they may not have qualified for through traditional lenders. Square uses the information they collect each month to determine how much a business can logically pay back, and then they pull about 10-11% of the gross daily payment value as repayment for the loan. So if a business experiences slow periods, they pay less during that time. They simply have the money pulled from their accounts until the loan is paid back.
The key is that Square does not fund these loans. Investors do. Square’s job is to make sure that the loan values match the ability of the business to repay the loans, and they seem to be quite good at this. Priestly said Square Capital sees an average default rate of only 4%, which is much lower than the industry standard of 7% for small businesses.
Even though Square’s transaction fees aren’t yielding big returns for the company, the data collected from those transactions can be used in other areas such as Square Capital. This is what analysts believe will keep Square afloat.