Square’s decision to eliminate its flat monthly fee for merchants could see the company lose business to competitors such as Intuit, LevelUp and Groupon that still have competitive fee structures.

By requiring all merchants to pay a per-swipe fee of 2.75 percent, similar to what the major credit card processors charge, Square is signaling the growing acceptance of mobile POS as a standard offering. As the market continues to mature, it is likely that other mPOS vendors will follow suit, bringing an end to lower credit card processing fees in mobile.

“With their high brand awareness and good retail distribution, Square is a force in the emerging mobile payments business,” said Drew Sievers, founder and CEO of mFoundry, Larkspur, CA. “However, the market is getting crowded and competition will be fierce.

“I suspect that other mPOS players will keep their fees low for the time being in order to capture more share, but eventually they will need to all increase their fees if they want to have a chance to generate any profit.”

Status quo
Until now Square let businesses with transactions of around $21,000 or less pay a flat $275 monthly fee, but Square is eliminating that option and requiring all business to pay-per-swipe fee of 2.75 percent. The fee does decrease as amount of transactions increase, which Square claims encourages growth, but it is clearly a significant change for smaller merchants.

“What’s really happening here is they’re reverting to the mean,” said Rick Oglesby, senior analyst at Aite Group, Boston. “They may lose some customers, but a lot of those customers don’t have that many places to go where they can get what square offers at a price that’s lower than what Square offers.

“I think Square’s trying to work a little more on making money,” he said. “That flat-fee program, if you’re at the higher end of the volume, you could pretty easily get your cost per transaction down quite a bit.

“That would have been obviously at Square’s expense, so they didn’t want to be subsidizing those businesses.”

Traditional credit-card processors charge swipe fees of 1.5-3 percent, so Square’s 2.75 percent is around average.

As businesses grow, however, the fee declines.

“This is the first time we’ve offered per-swipe rates lower than 2.75 percent,” said Aaron Zamost, spokesman at Square, San Francisco. “Small businesses can share information with us about their business at squareup.com/pricing. Rates are calculated based on the type of business, their average transaction size, and the business’ history as a Square customer.”

According to Aite Group’s Mr. Oglesby, the smaller merchants will not be affected by this change.

For merchants taking in about $10,000 a month, the 2.75 percent is equivalent to the $275 monthly fee.

The change will really affect midsize merchants who bring in around $20,000 a month. Mr. Oglesby expects Square to come out with a new pricing plan in the near future to cater to this segment.

“The average merchant, a typical merchant, is in the $120,000 annual volume range,” Mr. Oglesby said. “That 2.75 percent fee is already the standard in that space. It’s what PayPal charges.”

Short-term impact
It is possible that Square may lose some of its midsize clients, but these clients were not profitable for Square anyway, so it will not make a huge impact on Square’s business.

The likeliest recipients of that lost business will be other mPOS vendors with low-fee structures such as Intuit, Groupon and LevelUp.

Intuit charges a per-swipe fee of 1.75 percent plus a monthly fee of $12.95, or alternatively a pay-as-you-go option of 2.75 percent per swipe.

Groupon’s Breadcrumb POS, on the other hand, charges a 1.8 percent plus 15 cents per swipe, and LevelUp charges two percent per swipe.

“Under Square’s old policy, someone with $21,000 in transaction volume only paid about 1.3 percent for the processing,” mFoundry’s Mr. Sievers said. “That’s extremely low and most likely not sustainable.

“With so many smaller merchants using Square, they must have had a large, unprofitable customer base on the flat-fee program,” he said. “If you’re going public in the near future, it’s probably a better idea to shed the unprofitable customers now while you have time to rebound.”

Originally, the flat fee may have been established to attract merchants to a new service that was unfamiliar to them. By removing the flat fee, Square is signifying that it no longer needs a gimmick to attract new merchants, it is reputable enough to combat other offerings on its own merit.

Gearing up for IPO
Up until now, Square was offering a good deal for small businesses by enabling them to accept credit cards in an easy, efficient and inexpensive way.

However, that model has proved to not be sustainable.

According to Paula Rosenblum, managing partner at Retail Systems Research, Miami, the change in swipe fees may also signal that Square is readying itself for an IPO.

“I think it has built its base, is gearing up for an IPO and now has to start turning a real profit,” Ms. Rosenblum said. “I think the food truck operator probably nailed it – the old price was too good to be true.”

“I don’t think [the new fee structure] will slow adoption,” she said. “PayPal becomes a somewhat more viable competitor, and likely we’ll see Google Wallet and Amazon make some inroads, but Square has paved the way. I think they’ll be around for a long time to come.”

Final Take
Rebecca Borison is editorial assistant on Mobile Commerce Daily, New York