What is Square and Why Should Credit Card Companies Care?
The future of credit card processing for stores, both brick and mortar and online, is via Square.
Square offers brick and mortars, pop-ups, farmers markets, small restaurant owners, cafes, and everywhere in between a no-contract way to process credit cards, take online orders, deliver stuff, and powerful marketing software, all in house.
They even partnered with other companies so business owners can provide perks like health care, deductions, insurance, 401k’s to their employees.
Square really is a one-stop shop.
Which is why credit card companies should buy our Square while it is still swallowable.
As of this writing in October 2020, Square has a market cap of $82 billion.
Visa and MasterCard have a market cap of $432 and $345 billion, respectively.
It’s understandable that alone, one of the credit card companies might have a hard time taking over Square unless it can do an all-stock deal where the credit card company takes over Square using all of its stock as the money, instead of buying it with actual cash in order to preserve their cash hoard.
Which is why a joint venture between the two credit card companies, where both companies have a 50/50 percent ownership in Square, would make sense.
It’s been done before, where Disney owns half of the streaming service, Hulu, and Comcast owns the other half.
Buying Out Square Would Allow For Vertical Integration of Businesses And Therefore Capture More Money
If Visa and MasterCard takeover Square, it would allow vertical integration of their systems so they make money up and down various business structures instead of just being a credit card between businesses and customers.
Shown here are some graphics illustrating a regular business dynamic, the proposed vertical integration, and, just for kicks , how this vertical integration differs from a horizontal integration
Regular Business Dynamic
In a regular business dynamic, the customer doesn’t carry cash, so they use a credit card to make a purchase at a store.
The store usually has a piece of hardware to read and process the information from the customer.
The bank “loans” the money to the customer to make the purchase and stays as a balance on that customer’s credit card until it is paid off.
In the mean time, the balance is accruing interest, of which the credit card company is making money from the customer.
When the credit card processing machine batches out at the end of the day, that money is transferred from the credit card company to store owner’s bank account.
The credit card company also takes a percent from the store’s batch processes to pay back the customer for their “percent back” rewards perks for the credit cards.
Because companies like Square charge business owners a flat-free to process credit cards, usually 2.50%, if a customer uses a credit card that only offers 1% cash back, or a debit card that doesn’t offer any cash back at all, Square would make a profit on the difference.
However, it also works in reverse, where if a customer uses Apple Pay and taps their iPhone or Apple Watch to the payment processor, Apple will give the customer 3% cash back, and Square would lose money on the transaction.
So there are pros and cons to the one-flat-fee business model as opposed to the traditional credit card processing companies where they charge difference fees depending on what card is used.
If Visa and MasterCard buyout Square, it would help create a vertical integration of systems and processes for them to capture more money up and down the business structure and create one of the biggest payment processing companies in the world.
Where the money that square makes from the customer would now be going into the coffers of the credit card companies.
Also, because Square offers marketing, email campaigns, social media, online stores, deliveries, payroll processing, and a whole slew of other services, perks, etc., the credit card companies stand to benefit from the growth of these branches of Square as well.
Vertical integration makes sense because a horizontal integration might not be allowed under antitrust laws, seeing as how there are only 4 big credit card companies in America: Visa, MasterCard, Discover, and American Express (Amex).
One of the reasons why horizontal monopolies are frowned upon by the American government is because they limit the choices that people have to do business.
Imagine you live in a town where the only other town is hundreds of miles away.
And in town is only one grocery store.
But the grocery store owner hates you and doesn’t let you do business there just because he hates your guts.
Life gets rather difficult.
Also, if the business owner knows he’s the only grocery store for hundreds of miles, he starts getting cocky, and quality control starts to diminish because he reckons he can provide sub-standard service and quality to save on cost and still make money because he has no competition.
And the town is so small, it can only support one grocery store, because if another grocery store opens up, both grocery stores would go out of business because there just aren’t enough people to go to both places to keep them in business.
The issue with horizontal integration is that they limit the choices for customers to go to, and allow the businesses to stifle competition in the same industry
The Reason Why Vertical Integration Makes Good Business Sense
Vertical integration, on the other hand, allows for cost savings by creating a more efficient pipeline of products and services to go up and down the supply chain, distribution, fees, payments, etc.
In this example, it also allows credit card companies to be even more present in the customers lives, albeit silently and invisibly, not just existing as plastic things in wallets.
This would also increase clout when it comes to negotiating any potential business things they all need, like cloud computing, materials and supplies, vendor contracts, etc.
Visa and MasterCard, after buying out Square, should buy out PayPal too for this very same reason. But that’s a talk for another day.
If you know the decision makers at Visa and MasterCard, suggest to them to takeover Square first, then PayPal second.