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Mobile Payments : It's all in the pricing
The document outlines the credit card processing structure and fee system used by Square, detailing how transactions are processed and the competition within the market. It analyzes merchant preferences and behavior through surveys and regression analysis, identifying significant factors influencing their payment processor choice, primarily price sensitivity and brand preference. Recommendations are made for Square to improve profitability by incentivizing higher transaction values and removing fixed fees.
Mobile Payments : It's all in the pricing
- 1. Pamela Oren-Artzi| AnaidaCholakyan | Prashant Gosavi| Ravi Vayuvegula| Ambrish Verma
- 2. Credit Card processingstructure 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
- 3. Credit Card industryfee structure Only variable element in the fees… Fixed for everyone (1.54%) Interchange Fees Dues & Assessments Processing Costs
- 4. Square’s competition Features Dongle, iOS, Android Dongle,iOS, Android Phone body, iOS only Dongle, iOS, Android Hardware cost Free Free $29 Free Swipe fee 2.7% 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
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- 6. Who is usingSquare? 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
- 7. 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
- 8. Brand Fixed Fee Per TransactionFee CRM Solution Device Customer Support Transactions Conjoint Analysis Feature Set Reference Product Features Options
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- 10. Analysis overview 4. Regressionanalysis 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
- 11. 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 1 Lower Avg Revenue per Month
- 12. 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 2 Higher Avg Revenue per Month
- 13. Analysis results • Allmerchants 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
- 14. 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%
- 15. Customer Merchant Square Credit CardOrgs Square’s Transaction Mechanics Price = $100 2.75% 1.84% + $0.28
- 16. Square’s Break-Even analysis $3083cents 83cents 0cents Transaction Amount 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
- 17. $30 0 1 10 100 1,000 10,000 100,000 1,000,000 0% 5% 10%15% 20% 25% 30% 35% TransactionAmount($) 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
- 18. Pricing solution Merchant Mix Option1 Option 2 Pricing solution Merchant Mix Static Control Static Control What Should be Controlled?
- 19. 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 transaction 2. 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
- 20. Takeaways • Volume oftransactions (market share) does not mean profitability • Does Value Creation match Value Appropriation?
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