Square's much-publicized deal with new partner Starbucks is expected to provide the payments company with great new opportunities. But as Nebo Djurdjevic, CEO of payments solutions provider Cardis International, the deal will also present Square with new challenges that it hasn't faced before.
Djurdjevic acknowledges introducing their solutions at a top retailer like Starbucks is a great strategic move for Square. But the new deal means Square will face a fundamental problem in the card payments area: the unprofitability of processing small value transactions. Most transactions at Starbucks are obviously less than $10, and Square charges 2.75 percent for each transaction it charges to process. But with the current interchange rates that card issuers charge the acquirer - in this case Square - for each transaction, Square would actually lose money on each transaction it processes that is for less than $10, Djurdjevic says. Djurdjevic did the math on processing a $5 transaction for Square, and found that with various published interchange fees by different card issuers Square wool be losing between 4 and 14 cents on each transaction.
Even as Square moves towards more mobile transactions, the interchange rates would still apply on whatever credit card the customer has registered with the Pay with Square mobile app. Regardless of the actual payment device used - card or smartphone - Square has a problem on its hands.
This problem affects the whole industry though, Djudjevic points out, not just Square. Djurdjevic has been working on this problem as CEO of Cardis, and has developed a plug-in that is being used by Raiffeisen Bank, the largest bank in Austria, in its new contactless payments CardMobile initiative.
Card issuers currently charge the interchange fees for each transaction that is processed on the card, Djudjevic says. Instead of processing each transaction, with Cardis' plug-in the customer charges an amount to the card for processing and that amount is then made available to the customer to use through the mobile application to use for smaller transactions, much like when you take cash out of an ATM that to use for smaller purchases. This way the acquirer is only charged interchange fees for one larger transaction instead of many smaller ones. "This cost efficiency allows for lower merchant fees without jeopardizing the profits of issuers and acquirers," Djurdjvic explains. "It allows players like Square to profit from their core solutions."
Djudjevic says that Cardis, which is based in the Netherlands, is looking to expand to new markets.
However Square decides to confront the problem of turning a profit processing low-value transactions, it will be a central issue to their new partnership with Starbucks.