mobile payments : it's all in the pricing
DESCRIPTION
A in-depth view of how credit-card payment processing ecosystem work and Square is trying to establish itself in this difficult industry. Payment industry operates on very thin-margins and hence pricing makes a huge difference for a new player like Square to succeed.TRANSCRIPT
Pamela Oren-Artzi| Anaida Cholakyan | Prashant Gosavi| Ravi Vayuvegula| Ambrish Verma
Credit Card processing structure
1. Swipes CC 2. Seeks Authorization
5. Approval Processed
3. Verify Funds
4. Bank Authorizes Transaction
8. Funds deposited next
day to Merchant’s Bank
6. Merchant Receives Approval
7. Merchant Batches end of day
Card Issuing Bank
Merchant’s Bank
ProcessorMerchant
Credit Card industry fee structure
Only variable element in the
fees…
Fixed for everyone (1.54%)
Interchange Fees Dues & Assessments
Processing Costs
Square’s competition
FeaturesDongle, iOS,
AndroidDongle, iOS,
Android
Phone body, iOS only
Dongle, iOS, Android
Hardware cost
Free Free $29 Free
Swipe fee2.7% or
$12.95/mo. + 1.7%
2.7% $19.99/mo. or
Tiered/ transaction
2.75%
Non-Swipe fee
3.7% or$12.95/mo. +
2.7%3.5% + $0.15 N/A 3.5% + $0.15
Intuit GoPayment PayPal Here PAYware mobile Square
Square’s current offering
Who is using Square? And how?
1hr of Square location usage with general business category and relative dollar volume
Source: Data Visualization, Square, Inc. by Mike Bostock
Transaction Size
Repair, Contracting and
Business Services (>$250)
Occasional very large bubbles (ticket sale)
Merchants
Food, specialty Retail (earliest targeted and
adopters)
Local and Social Media
propagation
Location Distribution
Matches the US Night map
The Solution is ... The Problem
Price mechanism led to early adoption of
Small Businesses
Very Low Barrier to entry
The need to innovate on features in order to win the
competition
Brand
Fixed Fee
Per Transaction Fee
CRM Solution
Device
Customer Support
Transactions
Conjoint Analysis Feature Set
Reference Product
Features Options
12
1110
7249
Pr87
%00.36%75.25
275$499.9$3
21
OnlineInPerson
BinBNFCDNFCD
X
emiumLevelMid
PayPalIntuit
nTypeTransactio
DeviceDevice
Support
CRMCRM
RateRate
FixedpriceFixedprice
BrandBrandU
Utility function
Analysis overview
4. Regression analysis within clusters showed higher correlation
1. 28 Surveys conducted
Just answer our questions and
you won’t get hurt!
2. Initial regression analysis showed low correlation
It’s a non-linear pattern with outliers…but for
some reason I’m very happy with data.
3. Two clusters identified using K-Mean Clustering• Feature of IBM SPSS statistical analysis software
A
B
Analysis Results – Cluster 1
SUMMARY OUTPUT
Regression Statistics
Multiple R 0.7969
R Square 0.6351
Adjusted R Square 0.6168
Standard Error 2.1381
Observations 252.0000
ANOVA
df SS MS F Significance F
Regression 12 1901.524 158.460 34.663 0.000
Residual 239 1092.583 4.571
Total 251 2994.107
Coefficients Standard Error t Stat P-value Lower 95% Upper 95%
Intercept 7.8690 0.4666 16.8657 0.0000 6.9499 8.7882
$275 per month -6.3810 0.3299 -19.3411 0.0000 -7.0309 -5.7310
$9.99 per month -1.8690 0.3299 -5.6652 0.0000 -2.5190 -1.2191
InPerson+Online 0.7857 0.2857 2.7500 0.0064 0.2229 1.3486
3% per transaction -0.7619 0.3299 -2.3094 0.0218 -1.4118 -0.1120
Intuit -0.5119 0.3299 -1.5516 0.1221 -1.1618 0.1380
Premium 0.4405 0.3299 1.3351 0.1831 -0.2094 1.0904
Dongle+NFC+BinB -0.3929 0.3299 -1.1908 0.2349 -1.0428 0.2571
PayPal -0.2381 0.3299 -0.7217 0.4712 -0.8880 0.4118
2.75% per transaction -0.2024 0.3299 -0.6134 0.5402 -0.8523 0.4475
Mid Level 0.1667 0.3299 0.5052 0.6139 -0.4832 0.8166
Dongle+NFC 0.1429 0.3299 0.4330 0.6654 -0.5071 0.7928
24X7 -0.1071 0.2857 -0.3750 0.7080 -0.6700 0.4557
Statistically Significant Variables
Utility Coefficients
Cluster 1Lower Avg Revenue per Month
Analysis Results – Cluster 2
SUMMARY OUTPUT
Regression Statistics
Multiple R 0.3292
R Square 0.1084
Adjusted R Square 0.0636
Standard Error 2.2685
Observations 252.0000
ANOVA
df SS MS F Significance F
Regression 12 149.5178571 12.459821 2.4212305 0.00555942
Residual 239 1229.910714 5.1460699
Total 251 1379.428571
Coefficients Standard Error t Stat P-value Lower 95% Upper 95%
Intercept 6.8631 0.4950 13.8641 0.0000 5.8879 7.8383
$275 per month -1.2500 0.3500 -3.5711 0.0004 -1.9396 -0.5604
PayPal -0.8333 0.3500 -2.3807 0.0181 -1.5229 -0.1438
Mid Level -0.5357 0.3500 -1.5305 0.1272 -1.2253 0.1538
$9.99 per month -0.5000 0.3500 -1.4284 0.1545 -1.1896 0.1896
3% per transaction -0.4524 0.3500 -1.2924 0.1975 -1.1419 0.2372
24X7 -0.3571 0.3031 -1.1781 0.2399 -0.9543 0.2400
InPerson+Online -0.3036 0.3031 -1.0014 0.3176 -0.9007 0.2936
Premium -0.3214 0.3500 -0.9183 0.3594 -1.0110 0.3681
Dongle+NFC -0.1905 0.3500 -0.5442 0.5868 -0.8800 0.4991
Intuit 0.1548 0.3500 0.4421 0.6588 -0.5348 0.8443
2.75% per transaction -0.1548 0.3500 -0.4421 0.6588 -0.8443 0.5348
Dongle+NFC+BinB 0.0119 0.3500 0.0340 0.9729 -0.6776 0.7015
Statistically Significant Variables
Utility Coefficients
Cluster 2Higher Avg Revenue per Month
Analysis results
• All merchants were price sensitive to fixed monthly fees • Negative utility coefficients
• 50% of the merchants surveyed were brand sensitive and preferred Square over PayPal
• 50% of the merchants preferred same payment processor for both online and in-person transactions
• The most preferred product was
Utility Value & Market Share Analysis
Coefficients
Square
(Base
Product 1)
Square
(Base
Product 2) Paypal Intuit
Recomm.
Product 1
Recomm.
Product 2
Intercept 7.8690 1 1 1 1 1 1
$275 per month -6.3810 0 1 0 0 0 0
$9.99 per month -1.8690 0 0 0 1 0 0
InPerson+Online 0.7857 0 0 1 0 0 1
3% per transaction -0.7619 0 0 0 0 0 0
Intuit -0.5119 0 0 0 1 0 0
Premium CRM 0.4405 0 0 0 0 0 0
Dongle+NFC+BinB -0.3929 0 0 0 0 0 0
PayPal -0.2381 0 0 1 0 0 0
2.75% per transaction -0.2024 1 0 1 1 0 0
Mid Level CRM 0.1667 0 0 0 0 0 0
Dongle+NFC 0.1429 0 0 0 0 0 0
24X7 -0.1071 0 0 0 0 0 0
Utility Value 7.667 1.488 8.214 5.286 7.869 8.655
Market Share 33.8% 6.6% 36.3% 23.3% 36.8% 39.1%
Customer Merchant SquareCredit
Card Orgs
Square’s Transaction Mechanics
Price = $1002.75%
1.84% + $0.28
Square’s Break-Even analysis
$30 83cents 83cents 0cents
TransactionAmount
Cost to Merchant
Cost to Square
Loss/Profit to Square
$1 3cents 30cents -27cents
$10 28cents 46cents -18cents
$20 55cents 65cents -10cents
$40 $1.1 $1.0 10cents
$50 $1.4 $1.2 20cents
$30
0
1
10
100
1,000
10,000
100,000
1,000,000
0% 5% 10% 15% 20% 25% 30% 35%
Tran
sact
ion
Am
ou
nt(
$)
Effective cost to square
Minimum cost curve
• To generate profit Square’s average transaction amount has to be ≥ $30• Profit from high amount transactions will offset loss from low amount
transactions
Area of profitability
Area of loss
Variable fee Fixed fee
Consolidated cost/transaction 1.84% $0.278
Pricing solution
Merchant Mix
Option 1 Option 2
Pricing solution
Merchant Mix
Static
Control Static
Control
What Should be Controlled?
Recommendations
Current Value Prop: • Easy setup• Simple Pricing• Get paid fast
Goal: Square must attract higher value transactions via:
• Incentivizing merchants• Targeting segments with higher amount/transaction
Recommendations:1. Reward merchant to have high value transactions
a) Merchants get 0.25% cashback >= $50 transaction2. Target industries with higher amount/transaction
a) Provide industry specific rewards, e.g. merchants in travel, hotel and insurance payments via Square get 0.25% cashback.
3. Remove $275/month fixed fees product option.4. Add online &mobile payment processing. (e.g. Square Wallet)5. Incentivize customers to use Square Wallet:
• Customers using square wallet get 0.5% cashback for transactions $50 - $1000• Customers using square wallet get 1% cashback for transaction >= $1000
Takeaways
• Volume of transactions (market share) does not mean profitability
• Does Value Creation match Value Appropriation?
Thank You