Since its introduction in 2009, Square has become a prominent player in the payment processing industry. With the introduction of this new model of accepting payments, however, questions have arisen over whether — and when — Square is truly a superior choice to a traditional merchant account.
In this article, we’re going to take a deep dive into the two options to discuss their merits, drawbacks, and which is best choice in which situation.
Image via Flickr by frankieleon
Square Inc. wasn’t the first company to introduce a pay-as-you-go processing, but it is certainly the most successful. By pairing up with smartphone or tablet devices and providing the card-swipe attachment with your account setup, Square made an argument for simplicity. This has been especially helpful for startups that were overwhelmed by the options presented by merchant accounts.
The apparent complexity of merchant accounts may stem primarily from the number of choices available on the market today and the full range of plans available to suit different business needs. Merchant accounts typically also have long-term contracts (although they have become more flexible in recent years) and monthly fees.
Square’s philosophy of simplicity extends into its cost structure, which it sets at a flat 2.75 percent or 3.5 percent plus $0.15 for “card not present” purchases. By default, Square accepts all major credit cards in the United States, and the rates remain the same regardless of the card used. The major limitation is the weekly limit of $1,000 for “card not present” transactions.
Merchant accounts offer a variety of fee structures, and some of them are “tiered” — with various types of operations incurring different charges. These fee structures can get somewhat complicated, though it’s worth noting that the variety of options they offer are meant to suit the needs of different business types. However, at the simplest level, you can expect fees to start at around 1.5 percent plus $0.10 per transaction. Some card types have higher costs, while the fees for debit transactions are substantially lower.
Square’s reputation for customer support was weaker in its early years when the company relied heavily on online support forums and had limited phone support available. More recently, live phone support has become available, and the company’s reputation has improved. Merchant accounts, meanwhile, have various support packages but tend to have a phone and online support available, with many companies offering 24-hour availability.
Square’s simplicity can sometimes be a curse when its options and limitations contradict business needs; while a few alternate payment models are available, the options are substantially less diverse than those available through merchant account companies. Merchant account companies also cover special situations such as high-risk merchant accounts for bad credit, large volumes of online transactions, and much more.
While Square’s market share is difficult to determine, it’s certainly true that the company — not to mention similar businesses that have copied its business model — is a prominent choice in the market today. There are valid reasons to choose Square, especially in the early days of starting a venture. Its deployment time and the simplicity of its structure and hardware can get companies moving quickly, while its lack of monthly fees or contracts can save money and hassle.
Additionally, the lack of monthly fees fully counterbalances the higher transaction fee for companies with monthly sales totaling less than $1,000. The flat rate also means that businesses that have very low dollar values for each operation (for example, food vendors) may benefit even with higher volumes of transactions.
The dilemma arises because many startups choose Square due to its simplicity but fail to update to a more cost-effective service once they’ve outgrown the early stages of their business. So what point is right for that transition?
For companies with between $1,000 and $4,000 in monthly transactions, it’s important to ask follow-up questions. For businesses with a large volume of low-dollar transactions, Square may still be best while companies seeing a significant number of debit card transactions will certainly benefit from using a merchant account. And once monthly sales exceed $4,000, the savings provided by a merchant account are impossible to ignore. Any company experiencing or projecting this volume should shy away from Square’s higher transaction fees.
Ultimately, merchant accounts and Square serve very different audiences. While Square does an excellent job of helping startups with small monthly sales, merchant accounts offer lower costs and more comprehensive solutions for established businesses.