Should Traditional Merchant Acquirers 'Beware of Square'?

SHOULD TRADITIONAL MERCHANT ACQUIRERS "BEWARE OF SQUARE'? Square 2010 Smart Phones and Tablets Among the first to widely market a dongle and offer one flat rate became available as terminals Square Enters the Market The Result? 00 0: Card acceptance became available to a whole new category of merchants such as Landscapers, Plumbers, and School Fund-Raising Organizations who previously found it difficult or uneconomical to accept cards These micromerchants have generally not been pursued by traditional Merchant Acquirers due to: IO High attrition rates ..... Lack of viable technology O Low demand IO Low margin rates $25k - $50k Annual Processing Volume Processing Volume < $25k Annual 18% 30% Account Account Attrition Attrition Consumer trends and technological advances in electronic payments have opened - - - 1 a new market of card accepting merchants. This is where Square fits right in. % of Visa & The U.S. Merchant Market (Est.) MasterCard (V/MC) Sales Volume Traditional 150 Largest Merchants 50% Merchant 100,000 Large Merchants 30% Market 250,000 Medium Merchants 12% 5.5 Million Small Merchants .... 6% Square's market share New 25 Million Micromerchants -< 2% (2 million merchants) Merchant Market Square isn't appropriate for all merchant sizes Square merchants are different Lemonade Shop Some have been confused regarding this due to Starbucks' investment in and partnership with Square Some clarification: (1) Square's dongle isn't used at Starbucks $470,000 $4,000 2 Starbucks offers its customers the option for Square's mobile wallet Traditional Merchant's Approximate Average Annual V/MC Processing Volume Square Merchant's Approximate Average Annual V/MC Processing Volume 3 Square terminals don't offer the feature functionality many traditional merchants rely on Other Merchant Acquirers play in this space as well intuit. PayPal VerlFone. PROPAY NorthAmerisa Heartland The U.S. Merchant Acquiring Industry is not a zero sum market Generally, successful Merchant Acquirers have diversified merchant portfolios. Though Square's merchant types are diverse, their size and behaviors tend to be more similar. $3 Trillion Card Usage as a percent of Non-Durable Consumer Spending has nearly doubled since the year 2000 2012 The Merchant Acquiring Industry is growing 2000 Square Processed < 2% of the growth 179 from 2010 to 2011 $267 Billion Over 2/3 of U.S. small businesses don't accept cards $30 $8 Billion Billion Average of the Annual Growth Top 100 Merchant Annualized Acquirers V/MC 2011 Processing Square's Approximate 2011 V/MC U.S. Dollar Volume V/MC (2010 - 2011) Processing Volume Volume Is Square's Model Sustainable? 1 Risk & Underwriting Vs. Square's approval process is lenient compared to the market .... 2 Micromerchant Portfolio Micromerchants have higher attrition and longer payback periods It is unproven if Square's model 3 Security & Compliance will be sustainable Most of the Square readers in the marketplace are not encrypted The Verdict? Traditional merchant acquirers should be cautious of Square as a competitive threat due to its disruptive growth rates. However, it can be argued that much of Square's status is driven by its founder's PR prowess rather than a proven Remain Cautious sustainable business model. Square's emergence has come from offering the underserviced micromerchant market a dongle solution for card acceptance with a flat processing rate and its impact in the payments industry has been felt simply due to its existence. Merchant acquiring companies must be able to succinctly communicate to their stakeholders and the merchant community that they provide comparable or better solutions than Square's offerings. Square's model started with simplified payments acceptance but longer-term, it's business model end-game may center on marketing analytics. Additionally, Square may try to move upmarket and compete with legacy ISOS and processors in the future, as micromerchants have long been considered unprofitable. At this point in time, Square does have a substantial marketing advantage in the consumer marketplace (including many of the sole-proprietorships Square 'over the top' in the traditional merchant marketplace. the micromerchant arena), but this alone will not likely put Is Square a disruptor? Yes. Does Square have the ability to win long-term in the merchant acquiring marketplace? That remains to be seen. O Copyright 2012. The Strawhecker Group. All Rights Reserved. Sources TSG Merchant Database Square (1) (2) Visa MasterCard tig Bureau of Economic Analysis Morgan Stanley LP. Morgan The Trusted Advisor To The Payments Industry Metics Subscribe to TSG: in TheStrawGroup.com [email protected] 402.964.2617 Теxt TSGNF to 22828 %0E SHOULD TRADITIONAL MERCHANT ACQUIRERS "BEWARE OF SQUARE'? Square 2010 Smart Phones and Tablets Among the first to widely market a dongle and offer one flat rate became available as terminals Square Enters the Market The Result? 00 0: Card acceptance became available to a whole new category of merchants such as Landscapers, Plumbers, and School Fund-Raising Organizations who previously found it difficult or uneconomical to accept cards These micromerchants have generally not been pursued by traditional Merchant Acquirers due to: IO High attrition rates ..... Lack of viable technology O Low demand IO Low margin rates $25k - $50k Annual Processing Volume Processing Volume < $25k Annual 18% 30% Account Account Attrition Attrition Consumer trends and technological advances in electronic payments have opened - - - 1 a new market of card accepting merchants. This is where Square fits right in. % of Visa & The U.S. Merchant Market (Est.) MasterCard (V/MC) Sales Volume Traditional 150 Largest Merchants 50% Merchant 100,000 Large Merchants 30% Market 250,000 Medium Merchants 12% 5.5 Million Small Merchants .... 6% Square's market share New 25 Million Micromerchants -< 2% (2 million merchants) Merchant Market Square isn't appropriate for all merchant sizes Square merchants are different Lemonade Shop Some have been confused regarding this due to Starbucks' investment in and partnership with Square Some clarification: (1) Square's dongle isn't used at Starbucks $470,000 $4,000 2 Starbucks offers its customers the option for Square's mobile wallet Traditional Merchant's Approximate Average Annual V/MC Processing Volume Square Merchant's Approximate Average Annual V/MC Processing Volume 3 Square terminals don't offer the feature functionality many traditional merchants rely on Other Merchant Acquirers play in this space as well intuit. PayPal VerlFone. PROPAY NorthAmerisa Heartland The U.S. Merchant Acquiring Industry is not a zero sum market Generally, successful Merchant Acquirers have diversified merchant portfolios. Though Square's merchant types are diverse, their size and behaviors tend to be more similar. $3 Trillion Card Usage as a percent of Non-Durable Consumer Spending has nearly doubled since the year 2000 2012 The Merchant Acquiring Industry is growing 2000 Square Processed < 2% of the growth 179 from 2010 to 2011 $267 Billion Over 2/3 of U.S. small businesses don't accept cards $30 $8 Billion Billion Average of the Annual Growth Top 100 Merchant Annualized Acquirers V/MC 2011 Processing Square's Approximate 2011 V/MC U.S. Dollar Volume V/MC (2010 - 2011) Processing Volume Volume Is Square's Model Sustainable? 1 Risk & Underwriting Vs. Square's approval process is lenient compared to the market .... 2 Micromerchant Portfolio Micromerchants have higher attrition and longer payback periods It is unproven if Square's model 3 Security & Compliance will be sustainable Most of the Square readers in the marketplace are not encrypted The Verdict? Traditional merchant acquirers should be cautious of Square as a competitive threat due to its disruptive growth rates. However, it can be argued that much of Square's status is driven by its founder's PR prowess rather than a proven Remain Cautious sustainable business model. Square's emergence has come from offering the underserviced micromerchant market a dongle solution for card acceptance with a flat processing rate and its impact in the payments industry has been felt simply due to its existence. Merchant acquiring companies must be able to succinctly communicate to their stakeholders and the merchant community that they provide comparable or better solutions than Square's offerings. Square's model started with simplified payments acceptance but longer-term, it's business model end-game may center on marketing analytics. Additionally, Square may try to move upmarket and compete with legacy ISOS and processors in the future, as micromerchants have long been considered unprofitable. At this point in time, Square does have a substantial marketing advantage in the consumer marketplace (including many of the sole-proprietorships Square 'over the top' in the traditional merchant marketplace. the micromerchant arena), but this alone will not likely put Is Square a disruptor? Yes. Does Square have the ability to win long-term in the merchant acquiring marketplace? That remains to be seen. O Copyright 2012. The Strawhecker Group. All Rights Reserved. Sources TSG Merchant Database Square (1) (2) Visa MasterCard tig Bureau of Economic Analysis Morgan Stanley LP. Morgan The Trusted Advisor To The Payments Industry Metics Subscribe to TSG: in TheStrawGroup.com [email protected] 402.964.2617 Теxt TSGNF to 22828 %0E