Guest Column | October 10, 2013

How Can VARs Compete Against Square?

By Kevin Kogler, president, MicroBiz

Even Square’s competitors have to admire what Square has built.  In a few years, Square has gone from a small but well funded start-up to one of the best known players in the payment processing industry.  Square revolutionized the payment processing market for small businesses by being the first to market with a simple mobile payment solution that was easy to sign up for and simple to use — and came up with a transparent flat rate processing plan with no hidden fees. Further, Square has primarily sold its services directly to businesses, bypassing the established networks of VARs and ISOs.    

After initially underestimating the threat of Square, processors and ISOs are now directly competing with Square every day. In selling against Square, VARs need to demonstrate how Square is actually more expensive than a more traditional merchant account. This value proposition is often hard to clearly demonstrate given the opaque nature of the payment market.  Rates can vary greatly by retailer — as a merchant’s processing cost is influenced by numerous factors including the types of cards tendered by customers, average transaction size, and volume of transactions. Historically it has been difficult to quantify the differences between processing plans without a detailed statement analysis.    

We have taken a broader approach — and have compared the total cost of Square’s offering vs. a traditional merchant account using the interactive processing pricing tool available on the MicroBiz Cloud POS website. This comparison tool is based on actual historical merchant transaction data made available to MicroBiz Cloud POS by one of the largest payment processors in the U.S. The interactive tool allows a user to enter a few pieces of information on a merchant (store type, average transaction size, and projected processing volume) to compare the processing costs of Square to a more traditional merchant account. This comparison tool can help identify what types of merchants benefit from Square’s flat rate pricing model, and what types of businesses should stick with a traditional merchant account. 

Payment Card Mix

The largest component of the cost of accepting credit cards is the interchange rate, representing 70 percent to 90 percent of the overall processing fees. These fees are set by the credit card networks based on the card brand, region, the type of credit or debit card, the type and size of the merchant, and the type of transaction (e.g. online, in-store, phone order, card not present, etc.). To simplify interchange, many processors offer a tiered pricing structure, which groups the hundreds of different interchange programs into a three or four buckets or tiers with different rates.  In our comparative analysis, we used the following tiers and rates.


    Processing  Rate 




Debit cards



Non-rewards cards, card present, batches processed w/in 24 hours of authorization



Low cost rewards cards, transactions missing info, batch processed over 24 hours after authorization



Corporate, foreign and government cards, transaction missing key info, card not present, batch processed over 48 hours after authorization   

Using the rates above, a merchant with exactly 25 percent of card transaction volume falling into each tier would have a blended percentage or discount rate of 1.95 percent.

 In the real world, the percentage of card transactions in each tier is not equal and can vary greatly by type of business.  Businesses with the largest percentage of transactions in the highest cost bucket (represented here by Tier 4) tend to sell goods and services to customers that use corporate or rewards cards with high benefits or have high levels of card not present transactions. These types of businesses would include taxi and limo services, construction materials, contractor services, office furniture, and hotels.  On the other hand, businesses with the lowest percentage of tier-4 card transactions tend to sell goods and services that are paid for with debit cards or low cost basic credit cards. These businesses would include movie theaters, laundries, liquor stores, and fast food restaurants.   

The table below compares the bucketing of transactions by tier for three types of businesses based on actual historical data provided by a large payment processor.  Note how the grouping of transactions by tier and resulting blended discount rates can vary dramatically by type of business. 

Percent of Transaction Volume by Tier

Store Type

Tier 1

Tier 2

Tier 3

Tier 4

Blended Rate













Office Furniture






As shown above, the liquor store blended interchange cost is roughly half of the cost of an office furniture store. So, in the Square model, certain types of retailers (e.g. office furniture stores) are clear money losers, while others (e.g liquor stores) are much more attractive.  From a merchant’s perspective, businesses such as office furniture stores using a fixed rate plan are being subsidized by lower cost merchants such a liquor stores. The implication is that merchants accepting a high number of debit and plain vanilla credit cards transactions would be advised to look at a more traditional merchant account instead of Square.

Transaction Size and Processing Volume

The Square pricing model is a flat 2.75 percent with no monthly or annual fees. Square also offers a fixed cost plan which charges $275/month for a merchant’s first $250,000 in payment processing.  In comparison, traditional merchant accounts typically have a lower percentage fee (1.0 percent to 2.0 percent), but layer on various transaction and monthly fees which add to the overall cost.  For merchants with very low card volume or small average transaction sizes, the cost of these per transaction or monthly fees can add up. For example, a $0.20 transaction fee means a lot more to a vendor selling fruit at a street fair than a high-end jewelry store at shopping mall.  However, for higher volume or large ticket merchants, the per transaction and monthly fees are small piece of overall processing costs — so lack of any additional fees in Square’s flat rate offering is not particularly attractive. 

The $275 fixed cost offering complicates the math a bit, as the relationship between Square’s monthly cost and card volume is not linear.  The flat rate is attractive to merchants with volume nearing the $250,000 limit but less attractive to very small or large merchants.  To illustrate how the attractiveness of Square’s offering is influenced by transaction size and card volume, let’s look at two bike stores, one with an average transaction value of $10 and one with an average transaction value of $50.

Bike Shop – Comparative Processing Costs


$10 Average Transaction Size

$50 Average Transaction Size

Monthly Volume


Merchant Accnt



Merchant Accnt






































Assumptions on Merchant Account: Blended percentage rate of 1.6%, monthly fee of $20 and transaction fee of $0.20.  See for further details

The analysis shows that Square is the better deal for the bike store with the $10 average transaction size and at least $10,000 in monthly card volume.  As card transaction volume increases, the savings can total $100-$300 per month with Square. This illustrates how retail merchants with small transaction sizes ($0-$10) typically find Square attractive — primarily because the $0.20 per transaction fee of the traditional merchant account is a high relative to the $10 transaction size. However, at larger transaction sizes and card volume, Square can be significantly more expensive.  For example, a bike store with a $50 average ticket price and $50,000 in monthly card volume and would pay $242 per month or $2,905 annually more with Square.

The table above also reflects impact of the $275 fix rate plan from Square at the $25,000/month card volume level.  In general, merchants with $20,000 to $25,000 in monthly card volume realize benefits from the Square fixed cost plan.  In the example above, a bike store processing $25,000 in credit card transactions achieves lower processing costs with Square, regardless of transaction size.  However, this saving quickly evaporates at card volumes less than $20,000 or above $25,000 per month.

Other Factors

Another one of the selling points of Square is ease of use. The Square application can be used on mobile devices and makes it easy to add items to a transaction, collect tips, capture signatures and email receipts.  It can also gather customer contact information such as emails and generate basic reports.  For smaller simple businesses without inventory, Square may be all the business needs.  Plus, this application is included for free with Square. 

However, for more sophisticated business — particularly those keeping track of inventory and using their store system to order and accept delivery of merchandise — Square will not be sufficient.  Further, Square locks you into a single payment processing service — so you will need to change out POS software if you want to move off Square. Most other retail management systems today support multiple processors.

So, is a traditional merchant account cheaper than Square? The answer to the question is more complicated than a simple yes or no. In general, businesses where customers often use corporate or high value awards card may find Square attractive, while businesses that process a large percentage of transactions with debit or basic credit cards should stick with a traditional merchant account.  Similarly, small businesses with low transaction volume or low average transaction sizes may find Square attractive, particularly given the free mobile POS application.  However, stores with higher transaction sizes or card volume will likely see materially higher processing costs with Square. Businesses with monthly payment processing volume in the $20,000 to $25,000 benefit from the current $275 fixed rate offering, but this size of retailer will like find the Square POS application insufficient to run their business, plus these savings will disappear if the business grows above the $25,000 volume.