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Summary:

Mobile payment startup Square is giving small businesses an option to pay a monthly transaction fee of $275 instead of paying $2.75 per card swipe. That will save money for businesses who do more volume and will give them more predictability about their costs.

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photo: Square

Square rivals have tried to compete with the mobile payment startup by undercutting its 2.75 percent transaction fee. But Square is now turning the tables by offering a flat monthly transaction fee of $275 for merchants who do more volume.

It’s the first time that any of the mobile payment companies have gone with a monthly fee in lieu of a per-transaction fee. That gives businesses an option to do away with the per-swipe transaction fee, which can save considerable money for merchants who sell a lot of stuff. And it provides them with more predictability on what they can expect their costs to be.

There is a limit, however. Businesses who process more than $250,000 a year will have to pay the existing 2.75 percent card swipe fee when they go over that limit. But for any merchant who processes more than $10,000 worth of transactions each month, they stand to save by moving to a monthly fee. At the top end, a merchant could bring down their fees to 1.3 percent.

Keith Rabois, Square’s COO, said the decision was an extension of Square’s commitment to provide a simple fee structure to merchants. He said in the past, merchants encountered a variety of fees based on the type of business they own, the kind of cards consumers use, and the different loyalty programs attached. Now, merchants can think of their transaction fees as a fixed cost similar to rent.

“We focus from the start on the value proposition for users,” Rabois told me. “The most important part is understanding what they are paying and having some predictability about that.”

This is the latest escalation in the payment wars, as competitors whittle down the transaction fees they charge to merchants in an attempt to drive adoption. VeriFone’s SAIL debuted in May with a 2.7 percent fee for swiped transactions and 1.95 percent fee for higher-volume accounts that have signed up for a $9.95 monthly subscription. PayPal Here launched in March with a 2.7 percent fee for all transactions. More recently, LevelUp, a Google-backed loyalty and payment startup, said it would eliminate transactions fees for merchants who paid to run LevelUp campaigns.

It’s still not clear to me if Square can make money off this new fee structure. The company hasn’t provided details about how much it pays the credit card companies to use their networks. But Rabois said Square can make this work because it applies its large scale — it’s now doing $6 billion in annual volume — to secure good rates with the credit card networks. And it’s got two dedicated employees who are tracking what Square pays and looking for ways to optimize its rates.

The move is in keeping with Square’s attempts to simplify the way merchants do business. Square has worked to make merchant sign-up a minute-long process and also announced in April that businesses can now get immediate access to their funds in the bank account the next day. Square did away with an additional 15 cent transaction fee last year.

Whittling away at the transaction fees is one way to compete and should shake up the mobile payment market. But ultimately, I don’t think this will be the basis by which winners and losers emerge in this battle. The best payment systems will be the ones that offer a lot of valuable services like offers, loyalty, analytics, inventory, accounting or CRM. Square’s monthly fee will stir things up some and will force others to respond. But there’s only so far the fees can come down. Eventually, it will be about all the services outside of payments that determine who wins and loses.

  1. I think you mean: 2.75% of each transaction amount plus a flat $0.15 per transaction fee, not $2.75 per card tx.

  2. I was under the impression that visa/mastercard interchange fees are non-negotiable. $6B isn’t that much volume. At 1.3% they’ve got to be losing money.

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