BOOM! Square Just Roughly Doubled Its Business Overnight

Jack Dorsey, CEO, SquareJack Dorsey is pleased.

Photo: Owen Thomas, Business Insider

So what just happened to Square’s business, now that it’s handling all of Starbucks’s U.S. credit- and debit-card sales?In June, Square said it was handling the equivalent of $6 billion a year in payments.

We think it will soon be doing twice that. Here’s why.

Starbucks does roughly $12 billion a year in sales in the U.S. Of that, 25 per cent goes through its prepaid Starbucks Cards.

That program is run by First Data, and it’s not part of the Square deal—those transactions stay with First Data.

Starbucks does not say what mix of the remainder is paper or plastic. But a reasonable guess based on current trends is that about 25 per cent is cash and the rest—50 per cent—is on credit or debit cards.

So, boom—Starbucks just doubled Square’s effective annual payment volume from $6 billion a year to $12 billion.

Now, how much money is Square making on those transactions? Square and Starbucks would not comment on whether Starbucks pays the same rate as other Square merchants, which is a flat 2.75 per cent of transactions.

Jim Olson, a spokesperson for Starbucks, said that the company expected to save money over its current rates.

So it’s fairly likely that Starbucks negotiated a special deal. After all, it could just shift more payments onto its own Starbucks Cards, which saves it a lot of money over conventional credit-card processing fees.

But we also doubt Square is losing money on the deal.

With roughly double the payments volume, Square is in an even better position to negotiate favourable rates with Visa, MasterCard, and American Express. (Visa is an investor in Square.) Those rates likely let it profitably process small transactions, despite the widely held notion that it must be losing money on those sales.

Don’t get us wrong—Square is almost certainly losing money overall, and the Starbucks deal will not change that. But it’s losing money deliberately as it spends to grow its business, not because it’s processing credit cards at a loss.

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