The most stunning part of this is the "free" part.
The Durbin amendment regulates the cost of debit transactions over the Visa/Mastercard network. It's $0.22 + 0.05%.
Mossberg reports that Square is planning to monetize via "premium options" like international transfers. But still, $0.22+ is a lot to lose every time someone uses your mass-market service.
The dotcom did get some things right. The internet is a big deal. There are land grab markets. They got timing and lots of other details wrong.
Maybe they will need to have a freemium offering long term to avoid too balance this if they start hitting millions of active users. It should be easy enough to get $5 pm from big users.
They are playing for a big market(s) here. Very big. If bthey are paying to build their name and userbase, it could make good business sense.
We know a lot more hese days. Our instincts are better. We are not cming up with a valuation based on a multiplier of hits. A user of a financial service has a realistically high value.
I didn't say dot com got anything wrong. I'm saying raising hundreds of millions of VC dollars and practically giving it away is a dot com era strategy.
Remember when PayPal paid out a $20 referral bonus for each new customer? Yeah, those days.
No, I'm really not. All I'm saying is it's a similarly audacious, capital-intensive strategy that can only happen in very favorable capital markets.
It's worth looking at how PayPal tried to steer towards profitability in later days, though. They basically became more evil. When paying merchants, they try to trick you into preferring ACH transfers direct from your checking account over using your credit/debit card. The former has weaker consumer protections, no rewards and risks overdraft fees, but lets PayPal keep almost all of their 2.9% + $0.30 fee, since ACH costs just pennies.
Not saying Square is going to become evil. Just saying they'll have to figure out how to break even with it eventually, because right now there's a built-in operational loss that scales with usage.
It's called solving the chicken-and-egg problem by funding one of them. There was an Elon Musk interview about that stage - IIRC they invested/gifted ~100 million (!) in such activities; but this marketing paid back afterwards in billions.
If you say dotcom, the association is over-investing, ridiculously irrational valuation of companies/users/hits, pets.com, bankruptcy, find-the-bigger-fool, etc.
Dotcom days also implies flawed business models that are unlikely to ever be profitable for the company, nevermind investors. I think it was a relevant use of the word considering the point of abalone's argument.
Upthread [0] someone mentioned these transactions are being processed as 'refunds'. Perhaps these transactions are not required to use the same fee structure?
I believe the original Square payment system processes billions of dollars in transactions every year at 2.0%. Perhaps this is more of a customer acquisition platform with premium features to come.
my guess is the '1-2 days' for you to get your cash is how they are monetizing it. Sure, a poster above got $1 almost instantly, but as volume increases, 1-2 days in some form of investment vehicle will add up.
They'd want to be making returns north of 20% per year just to offset the fees alone if the numbers abalone outlined are correct.
Edit: to elaborate on how I calculated that:
1. We don't know transaction size so I just focused on the 0.05% transaction fee. Obviously if transaction sizes are small, the fixed element of fee is higher as a proportion of the amount held for 1-2 days so the required return to break even is much higher.
2. If the transaction fee is 0.05%, $1 transferred turns into $0.9995
3. Square is sending $1 to the recipient. Therefore to break even, it must turn 0.9995 into $1.00 in the 1-2 days it holds the cash for.
4. To do that in 1 day, it must earn a return that is roughly equal to 20% annualized. So the annual return is (0.9995 x 20) = 0.1995. The daily return is 0.1995/365 = roughly 0.0005.
5. Adding the return of 0.0005 to the $1 brings you back to the $1 that Square sends on to the recipient. So they break even if they are earning 20% a year on the cash they hold before it gets sent on to the recipient.
Note the required return to break even is lower if they hold the cash for 2 days. However I'd guess they don't because one of the banks along the way probably hold it for at least half that time. Also, even if they do hold it for 2 days, you still have to overcome the fixed cost, so that moves the required return back towards my 'north of 20%' figure.
PS - since the Square guys are obviously smart, I'm sure they've done the above math so I'd question whether they really are paying these kinds of fees on each transaction. However if they are, Abalone's dotcom days comment is entirely correct.
Of course, it all depends on the volumes. If someone uses the site 10 times, who cares about the $0.22? 100 times, you might start caring. 1000 times, you might not want them.
The Durbin amendment regulates the cost of debit transactions over the Visa/Mastercard network. It's $0.22 + 0.05%.
Mossberg reports that Square is planning to monetize via "premium options" like international transfers. But still, $0.22+ is a lot to lose every time someone uses your mass-market service.
Good thing they raised $341M of VC money.
Who said the dot com days aren't back??
Source: http://allthingsd.com/20131015/the-money-is-in-the-email/