GoPayment, Square, Processing Fees and Cupcakes

Suddenly it looks like the owner of the cupcake store of TechCrunch Jay Donovan’s story hasn’t made such a clever business decision by selecting Square as her credit card processing provider after all. It turns out that a Square competitor could be processing her cupcake payments at a rate that is lower by more than one percent, losing even more money than Jack Dorsey’s start-up in the process.

Intuit GoPayment, the Square competitor in question which has just partnered up with Verizon, has also dropped the fixed per-transaction component of its processing fee, which seems to be the current fad in the mobile payments world, even though that makes no sense at all.

What GoPayment / Verizon Customers Get

Here is what GoPayment’s blog tells us about the pricing details of their Verizon offer:

For Verizon Wireless customers, the GoPayment credit card reader is free after you’re approved for a GoPayment account and you file the mail-in rebate, which refunds to you the $29.97 purchase price.?áWe’re also making it easier for Verizon Wireless customers to get started with a discounted service plan for the first two months. This is a great deal for those of you who expect to process a higher number of credit card payments. Under this offer, you’ll spend just $12.95 a month and pay the low rate of 1.7 percent for swiped transactions.

Of course, we’re still offering our basic service plan as well, which has no monthly or cancellation fees and offers a 2.7 percent discount rate for swiped transactions.

Intuit tells us that GoPayment is available to “everyone,” even as their Terms & Agreement explicitly states that the “use of the Services is subject to your being affiliated with a merchant that has an active Intuit Payment Solutions merchant account.” So GoPayment is not exactly available to individuals, as Square is, but the lack of fixed monthly service and cancellation fees, combined with the lower processing fees, makes it the better choice for small businesses.

Why Is the Per-Transaction Fee a Big Deal?

Now back to the per-transaction component of the processing fee. As I’ve pointed out in my cupcake post and before that, Square is losing money on transactions below a certain threshold that varies by card type. For regular Visa and MasterCard credit cards, the threshold is about $8.50, give or take, and it is higher for special card types, such as rewards, commercial, business-to-business, etc. Square’s break-even threshold is lower for debit card transactions, but once the interchange limit goes into effect in October, that one too will rise above the one for regular credit cards.

The break-even threshold is much higher for GoPayment’s “High-Volume Plan,” as high as $60 or so for regular Visa credit cards and even higher for MasterCard. Now, this plan does come with a monthly fee, which will protect them from losing money from low-volume accounts, but our cupcake store would certainly be a money-loser, even though their transactions will be processed at a lower interchange and the break-even threshold will also be lower.

The Takeaway

I really have no idea why Square, GoPayment and their competitors are falling over one another in their rush to dispose of the fixed transaction fees. I understand that their overarching priority right now is to grow as quickly as they possibly can, but this is a strategy that will inevitably need to be adjusted at some future point or other. If their plan is to reintroduce the fixed fee or to set a minimum transaction fee later, I think they will discover that the merchants that will be affected by such a change will not like it and push back hard against it.

The issue will become even more acute in October when the per-transaction component of the debit interchange fees will rise to $0.22 and the break-even threshold for small-ticket debit transactions will rise quite substantially. Perhaps Square and GoPayment will be forced to redo their pricing models sooner than they would like.

Image credit: Wikimedia Commons.