Page 10 - GS140501
P. 10
News
ChapterTitle
Financial pressures assessed the fee, which will apparently raise costs for
aggregators.
on Square appear FANF was implemented two years ago to offset costs
incurred by Visa for the dual debit card routing mandate
to mount of the Durbin Amendment to the Dodd-Frank Act. FANF
obligates payment service providers to charge merchants
an additional monthly fee based on their electronic
payment volume. For traditional ISOs, that meant
quare Inc. is a favorite punching bag of the assessing the complicated FANF on all merchants in their
payments industry. With the Wall Street Journal portfolios.
reporting that Square lost roughly $100 million
S in 2013 and has engaged in acquisition talks However, FANF did not apply in the same way to
with tech giants, critics have more ammunition with aggregators, who pool small and micro-merchants into
which to disparage the payment innovator. However, large merchant accounts controlled by the aggregators
Square is not without resources and leverage among a themselves. Instead, Visa charged the aggregators a lump
significant class of merchants, and payment experts warn sum of no more than $40,000 per month in FANF fees,
against making predictions of Square's imminent demise. based on the overall volume of payments from those
merchants, and not merchant by merchant.
On April 21, 2014, the WSJ cited anonymous sources who
said Square processed over $20 billion in transactions in The change in FANF means the majority of individual
2013 and realized approximately $550 million in revenue merchants in those aggregated accounts will be assessed
from that volume. However, said sources stated the $100 the fee based on a complicated calculation of card-
million deficit last year had expanded over 2012 losses, present and card-not-present transactions processed by
and the startup had burned through over half of the each merchant. The micro-merchants that process no
$340 million in venture capital it has attained since its more than $200 per month will apparently be the only
founding in 2009. aggregated merchants exempt from FANF.
In the same article, the WSJ's sources claimed Square For Square, the upshot of this change is that an unknown
had approached Google Inc., Apple Inc. and PayPal Inc. but substantial amount of its merchants will be assessed
about purchasing the San Francisco-based payment firm the fee individually, which will likely add up to more
founded by social media pioneer Jack Dorsey. An April than the $40,000 cap now in place.
21, 2014, Forbes opinion piece also said Square had "secret"
acquisition talks with Visa Inc., which has a sizable Don't underestimate Square
investment in Square. But a Square spokesman denied
these claims. Ken Musante, President of Eureka Payments LLC, stated
that "with a stroke of a pen [by Visa], Square's costs
Using the same statement that has circulated in other have increased dramatically." He said Square's main
media outlets, the Square spokesman told The Green Sheet advantage and market differentiator is the simplicity of
that "We are not, nor have we ever been in acquisition its marketing and charging merchants one flat fee. But
talks with Google, and while we appreciate that Square the new FANF schedule might force Square to increase its
may be an attractive target for some companies, we have fees on merchants. "If they raise rates, and they raise rates
never seriously considered selling to anyone or been in by a flat percentage, that keeps the simplicity but does not
any talks to do so." necessarily put the increase in revenue in line with the
increase in costs," he said.
A change in FANF
If the published reports about Square's processing versus
If the numbers cited above are accurate and Square is far its revenue are to be believed, FANF will only exasperate
from even balancing its books, Visa's decision to change its attempts to achieve profitability. "It seems difficult for
the ground rules on its Fixed Acquirer Network Fee them to just be able to grow their way out; even if they
(FANF) means Square's balance sheet will apparently get to a point where their margin is profitable, it's still not
skew further into the red. where they want to be," Musante said.
In mid April, Visa circulated a bulletin among acquirers A popular thread on the GS Online MLS Forum zeros in
that reportedly said the FANF fee schedule would be on the vulnerabilities of Square's business model and its
officially modified on April 1, 2015, so that many micro- inability to gain profitability from its pool of low-volume/
merchants using aggregators like Square and PayPal low-transaction merchants. But Musante cautions against
to process electronic payments would be individually underestimating Square.
10
ChapterTitle
Financial pressures assessed the fee, which will apparently raise costs for
aggregators.
on Square appear FANF was implemented two years ago to offset costs
incurred by Visa for the dual debit card routing mandate
to mount of the Durbin Amendment to the Dodd-Frank Act. FANF
obligates payment service providers to charge merchants
an additional monthly fee based on their electronic
payment volume. For traditional ISOs, that meant
quare Inc. is a favorite punching bag of the assessing the complicated FANF on all merchants in their
payments industry. With the Wall Street Journal portfolios.
reporting that Square lost roughly $100 million
S in 2013 and has engaged in acquisition talks However, FANF did not apply in the same way to
with tech giants, critics have more ammunition with aggregators, who pool small and micro-merchants into
which to disparage the payment innovator. However, large merchant accounts controlled by the aggregators
Square is not without resources and leverage among a themselves. Instead, Visa charged the aggregators a lump
significant class of merchants, and payment experts warn sum of no more than $40,000 per month in FANF fees,
against making predictions of Square's imminent demise. based on the overall volume of payments from those
merchants, and not merchant by merchant.
On April 21, 2014, the WSJ cited anonymous sources who
said Square processed over $20 billion in transactions in The change in FANF means the majority of individual
2013 and realized approximately $550 million in revenue merchants in those aggregated accounts will be assessed
from that volume. However, said sources stated the $100 the fee based on a complicated calculation of card-
million deficit last year had expanded over 2012 losses, present and card-not-present transactions processed by
and the startup had burned through over half of the each merchant. The micro-merchants that process no
$340 million in venture capital it has attained since its more than $200 per month will apparently be the only
founding in 2009. aggregated merchants exempt from FANF.
In the same article, the WSJ's sources claimed Square For Square, the upshot of this change is that an unknown
had approached Google Inc., Apple Inc. and PayPal Inc. but substantial amount of its merchants will be assessed
about purchasing the San Francisco-based payment firm the fee individually, which will likely add up to more
founded by social media pioneer Jack Dorsey. An April than the $40,000 cap now in place.
21, 2014, Forbes opinion piece also said Square had "secret"
acquisition talks with Visa Inc., which has a sizable Don't underestimate Square
investment in Square. But a Square spokesman denied
these claims. Ken Musante, President of Eureka Payments LLC, stated
that "with a stroke of a pen [by Visa], Square's costs
Using the same statement that has circulated in other have increased dramatically." He said Square's main
media outlets, the Square spokesman told The Green Sheet advantage and market differentiator is the simplicity of
that "We are not, nor have we ever been in acquisition its marketing and charging merchants one flat fee. But
talks with Google, and while we appreciate that Square the new FANF schedule might force Square to increase its
may be an attractive target for some companies, we have fees on merchants. "If they raise rates, and they raise rates
never seriously considered selling to anyone or been in by a flat percentage, that keeps the simplicity but does not
any talks to do so." necessarily put the increase in revenue in line with the
increase in costs," he said.
A change in FANF
If the published reports about Square's processing versus
If the numbers cited above are accurate and Square is far its revenue are to be believed, FANF will only exasperate
from even balancing its books, Visa's decision to change its attempts to achieve profitability. "It seems difficult for
the ground rules on its Fixed Acquirer Network Fee them to just be able to grow their way out; even if they
(FANF) means Square's balance sheet will apparently get to a point where their margin is profitable, it's still not
skew further into the red. where they want to be," Musante said.
In mid April, Visa circulated a bulletin among acquirers A popular thread on the GS Online MLS Forum zeros in
that reportedly said the FANF fee schedule would be on the vulnerabilities of Square's business model and its
officially modified on April 1, 2015, so that many micro- inability to gain profitability from its pool of low-volume/
merchants using aggregators like Square and PayPal low-transaction merchants. But Musante cautions against
to process electronic payments would be individually underestimating Square.
10
