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How Square Keeps Its Take Rate High

By Adam Levy - Mar 2, 2017 at 9:26AM

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Square's transaction revenue margins aren't being hurt by large sellers.

An increasing percentage of Square's (SQ 2.57%) merchants are considered larger sellers. Last quarter, 14% of Square's total gross payment volume came from businesses generating greater than $500,000 in GPV. That's up from 12% in the fourth quarter of 2015 and 9% in 2014.

It's not uncommon for big customers to get a volume discount. Indeed, Square offers custom pricing to its largest sellers.

But even as those big merchants' GPV grew from about $630 million in the fourth quarter of 2014 to about $1.92 billion last quarter, Square's take rate has remained relatively stable: The take rate is the percentage of each dollar Square keeps as transaction-based revenue from the gross payment volume it processes. Square took 2.94% of every dollar it processed last quarter, down marginally from the fourth quarter of 2014 (2.97%) and up 1 basis point from last year.

Square's point of sale stand.

Image source: Square.

Selling an ecosystem, not a payments processor

While Square may offer custom pricing to its largest sellers, CFO Sarah Friar suggests the discount isn't that big. That's because merchants see value in the total package Square provides. Square doesn't just provide a way for a business to process credit card payments, it's a whole point-of-sale system. It helps retailers manage inventory, it makes it easy to connect online and brick-and-mortar operations, and it can also manage accounting tasks like payroll.

Regardless of the size of a business, there's value in all of that beyond processing payments. That enables Square to exercise some pricing power, because the cost of replacing all of those features is relatively expensive in both time and money. Even large businesses are willing to pay more for convenience.

As Square rolls out more features to its merchants, the value continues to increase. So, as large sellers come on board looking for a discount, Square can go to the negotiation table and show them an ever-increasing value proposition.

Not only that, but Square's ancillary products like Square Capital and Instant Deposit are all differentiating factors from other payment processors. Those products are largely exclusive to Square's payments customers. That's another added value from Square.

Growing higher-margin payment services

Square introduced Invoices back in 2014, and the product has grown to account for 4.5% of GPV as of the last quarter. Square charges a higher fee for invoices compared to its standard payment processing. Usually invoices cost 2.9% + $0.30, but if a merchant elects to use a customer credit card it has on file to pay an invoice, the merchant will pay 3.5% + $0.15.

Invoices grew 68% year over year last quarter, twice as fast as its overall GPV growth. Growth in Invoices also outpaced the 47% increase in revenue from larger sellers (which Square defines as greater than $125,000 in annual GPV). As such, the higher take-rate payments are helping offset the slightly lower take rate from larger merchants.

Square is highly unlikely to introduce a new product with a lower take rate than its standard payment processing; the 2.75% rate is about the lowest any payment processor can go, and competing services charge very similar rates. That means the take rate will only go up if and when Square introduces new higher-margin products.

Overall, Square's take rate remains stable even as it adds lots of big merchants. "I think I would just look at what the overall trend line has been, and just stay on the trend line. We don't expect it to particularly shift one way or the other," Friar told analysts on Square's fourth-quarter earnings call. As long as GPV continues to grow at the stellar pace it has been, that's very good news for Square investors.

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