Why #Squarepocalypse Is No Real Concern to Square Stock
In recent weeks, payment-processing specialist Square (NYSE:SQ) has incurred notable volatility. Most likely, the weakness in Square stock is due to broader concerns impacting the major indices. When you have a trade war, geopolitical flashpoints, and a domestic political circus, the markets are unsurprisingly not amused.
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Of course, these issues don’t have anything to do directly with Square stock. However, a recent news item popped up that may worry some stakeholders.
Late last month, Square announced a change to its transaction cost policy. Beginning the first of November, the company will charge 2.6% plus 10 cents “for tapped, dipped, and swiped transactions.”
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Previously, the transaction cost was a flat 2.75%. As The Motley Fool contributor Adam Levy noted, the original fee structure “meant Square was taking a bath on the fees it paid on smaller transactions because there’s a fixed cost involved with processing payments.”
And this dynamic represented a challenge for SQ stock over the long haul. Currently, around 46% of Square’s payment volume involves smaller merchants. Therefore, management’s pricing decision will help cover this gap while funding future opportunities.
Unfortunately, not all SQ member businesses are happy about the change. With a lower cut but the inclusion of a nominal flat charge, this structure benefits Square’s larger clients. On the flip side, it hurts the small-volume folks.
Moreover, affected small business owners are actively voicing their complaints, asking their customers to pay in cash. That sidesteps the net increased cost. Other companies are seeking alternatives to Square’s platform.
On paper, this sounds like a bad gig for Square stock. However, I wouldn’t let this noise detract you from a viable long-term opportunity.
Headwinds and SQ Stock
I understand why businesses are complaining about the change. For those dealing with low-cost, high-volume transactions such as coffee shops, that new flat dime fee can add up quickly.
At the same time, I don’t understand why businesses are complaining to the degree that they are. For example, disgruntled business owners have rallied around the Twitter (NYSE:TWTR) hashtag #Squarepocalypse.
Moreover, on Sprudge.com, contributor Zac Cadwalader declared that SQ “just increased their transaction rates and cafes are screwed.” Further, Cadwalader wrote the hypothetical situation:
As an example, on a $5 transaction for your favorite cappuccino, Square would take $.14 in their old pricing model. Under the new model, they will take $.23, which is just under a 67% increase. In fact, in order for a business to not see a rate increase, their credit card sales would have to average $66.67 per swipe. I don’t care how much avocado toast you sell—those aren’t coffee shop numbers.
I’m having trouble with the math, and therefore, I don’t see the overwhelming risk against Square stock. While the net transaction cost increase of each $5 coffee is indeed around 67%, I don’t see how that translates into businesses needing to increase their price tag by a whopping 1,233%.
For Square subscribers to “overcome” this new policy change, they merely need to raise the cost of their products by 10 cents. After all, Square’s percentage cut will drop to 2.6%.
Naturally, I recognize that you never want to pass on additional costs to your customers if you can avoid it. At the same time, I think these small businesses are making a mountain out of a molehill. A 10-cent upcharge won’t impact most customers, and it certainly won’t kill SQ stock.
Square Stock: Focus on the Bigger Picture
Lastly, my suggestion for both investors of SQ stock and Square business subs is the same: focus on the bigger picture.
From a PR perspective, the optics regarding the above issue don’t look great for Square stock. However, disrupting the payments-processing industry isn’t cheap. Initially, SQ offered very attractive rates for small business owners. But in order to sustain this disruption, something has to give.
I also find this campaign against Square a tad hypocritical. The tech firm helped small businesses level the playing field with their larger counterparts. Moreover, Square offers comprehensive management and accounting programs to improve operating efficiencies.
But when this innovative firm makes an adjustment to sustain this digitalization and disruption movement, suddenly, there’s an issue? On principle, I don’t agree with these complaints. Plus, if it’s such a big deal, business owners are free to seek better alternatives.
Oh, what’s that? Square is the better alternative? This is the reason why management can make the change. It’s also why the associated “uproar” won’t truly impact SQ stock.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
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