Square is taking a bigger bite at the small-business market by offering flat-fee processing to small merchants, furthering the company's efforts to present itself as a more full-featured option for card acceptance.

This comes barely a week after Square Inc. stole the spotlight by securing a $25 million investment from coffee giant Starbucks Corp., which also agreed to use Square's software and its processing services.

And while Square is not the first company to attempt to woo merchants by cutting processing costs, Square CEO Jack Dorsey is crystal clear that this move is aimed at more than just the mobile-payment market his company made its name in.

"For 62 years small businesses have paid 3-7% to accept credit cards. No more," Dorsey said on his Twitter account

Square's new rate is 0% per transaction if merchants pay $275 a month. There are limits — no single transaction can exceed $400, and merchants are capped at $250,000 in transactions per year. Merchants still have the option of paying 2.75% per swipe with no monthly fee.

Square's new offer of buying a block of transaction volume is common in the early stages of a product pricing model, says Richard Crone, chief executive of San Carlos, Calif.-based payments consulting firm Crone Consulting LLC.

"It's a novel approach for Square, but it's to be expected when you don't know what the adoption rate will be, nor the transaction volume," Crone says.

Square did not respond to inquiries prior to deadline, but its website noted that manually entered and cash transactions do not count toward the $250,000 limit. Any card-swiped transactions over the $250,000 limit would carry a 2.75% swipe fee. The company did not indicate if chargeback costs are covered in the monthly rate.

The deal will sound attractive to micro merchants because, in combination with the Square reader, business owners would not be paying for terminals or individual transaction fees, Crone says.

However, merchants will need to calculate what option works best for them, while also monitoring closely if consumers are paying with cash or payment cards and how that relates to the yearly limit, he adds.

A merchant that opts for the monthly rate and stays within its limits would handle 5,000 transactions a year if the average transaction amount is $50. The effective total bundled-percent-of-sale interchange rate would be 1.32% in that scenario, Crone estimates. But if the merchant only processes $62,000, the effective rate shoots up to 5.28%. 

"Square has some advantages here," Crone says. "First, they get better cash flow from the up-front payments, and the actual interchange goes up unless the merchant reaches that limit [with fewer transactions]."

Square's pricing plan is no different than asking a consumer to pay a flat rate for a certain number of cell phone minutes, Crone says. "It's a very smart move on Square's part, but will the merchants drink the Kool-Aid?"

Other alternative and mobile payment companies have also offered creative pricing options, with mixed results.

Google Inc. tried to offer free processing with Google Checkout, an online payment service it launched in 2006. Initially, Google waived its processing fees for clients for up to 10 times the amount they spent on advertising in Google's AdWords service. Google ended this pricing incentive in 2009, and it ended Checkout as a standalone product last year.

More recently, SCVNGR's LevelUp began attracting attention for its free-processing offer. In July it dropped a 2% transaction fee it charged to instead make its money on a loyalty and incentive system it ties to its mobile-payments app.

Other companies are trying to cut costs in different parts of the payments equation. GoPago, for example, charges merchants a 2.85% rate to accept card payments but offers all hardware for free, including a Google Android tablet.


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