Jack Dorsey: Today Starbucks Signed up for Square

> "[. . . ] American Express (the card that plenty businesses hate) [ . . . ]"

This is divergent, but I feel compelled to defend Amex here on the basis of quality of leads and consumer ethics, with the main contention being a higher processing fee for Amex relative to Visa and Mastercard.

# Quality of leads

"Amex cards account for approximately 24% of the total dollar volume of credit card transactions in the US, the highest of any card issuer" [1].

In general, merchants absorb credit card fees because they allow consumers to make purchases in more spur-of-the-moment situations. For example:

* "I want this $4 coffee, but I don't have cash. Without a credit card, the purchase would not occur."

* "I want this $1000 refrigerator, but I lack the cash to pay for it all at once. A credit card allows me to purchase it now and deal with the implications later as I pay for it over time."

* "I want this $1000 refrigerator, but I don't normally carry that much cash on me, so making this impulse decision is enabled by my credit card."

* "I want to buy a $400 lunch for our client, but I can't have direct access to my company's money."

American Express may charge a higher percentage per transaction, but Amex users in general spend 2x-4x per transaction relative to other credit-based cards [2], thus in the end justifying their higher fee per transaction overall in the business that credit cards generate. This is due to both the demographics of consumers using Amex and the higher percentage of businesses using Amex. Thus, the lattermost two situations above are ostensibly inflated for Amex, therefore justifying a higher percentage fee.

For smaller retailers, they may see that only 10% of their customers use Amex, but they may neglect to factor in the whole buying process of "I lose ~20% of revenue if I refuse Amex, because Amex users spend double per month, so the 50% upcharge over Visa/Mastercard is justified." Starbucks understands this, which is why they do not refuse an Amex for a $1 cookie - they understand that the guy purchasing $30 of coffee for the business meeting is likely doing so on a company Amex.

So, while a retailer may be angered by the occasional Amex user who brings tighter margins, in the overall scope of things the quality of lead is sufficiently higher for Amex users to justify a higher percentage fee.

Note: Here I use "quality" for a lead to represent frequency of purchase, per-purchase volume, and credit reliability.

# Consumer Ethics

I personally use an Amex charge card for my day-to-day transactions because of the revenue breakdown of Amex verus the other major cardholders.

"Visa and MasterCard get about 20% of their revenues from merchant fees. American Express gets 65% of its revenues from merchant fees, because it relies less on interest payments (most American Express card holders don't carry a balance)." [3]

This is an opportunity for me to 'vote' with my pocket book, and I think that the yearly cost of an Amex justifies the service. A fradulent transaction is easy to erase because American Express profits from me as a happy and successful consumer. Furthermore, with a charge card, I cannot dig myself into a pit of debt - if I cannot pay my transactions one month, I cannot continue charging the following month, thus hurting both me and American Express. The business model is profitable when I balance my finances and maintain good finances, whereas the other major card companies profit mainly when I start to fall into a pit of debt. I feel that this revenue model thus benefits me as a consumer, rather than intentionally setting me up for failure.

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Overall:

As an entrepreneur building my own businesses, I accept Amex because I value the free market decisions of my consumers to use Amex, and in the overall scope of transactions, their educated decision behooves both of us.

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[1] http://en.wikipedia.org/wiki/American_Express

[2]http://www.wikinvest.com/stock/American_Express_Company_(AXP...

[3] http://seekingalpha.com/article/20331-guide-to-credit-cards-...

Will have an impact also in terms of economies of scale. Their transaction fees _should_ go down as they process a larger number of transactions. Makes the partnership much more strategic, and it makes sense why Starbucks also invested - might have been part of the package.

Some disjointed thoughts:

* If a consumer favors their Amex over their other cards, then they favor retailers who accept Amex. Thus the higher fee is justified with more repeat business.

* My mother's company has one line of credit: her Amex. If her Amex is refused, she has to pay with her personal credit or debit card, then go through the rigmarole of a personal refund. In corporate America, Amex is the standard due to its ease of internal accounting and external reputation. With the former, the better reporting of transaction information justifies its use in the accounting department. With the latter . . .

* Amex has established itself sufficiently as a luxury brand,

e.g. if you take your client out to lunch, it could be out-of-place to pay with anything but an Amex.

Furthermore, if your business does not accept Amex, it alienates luxury-seeking consumers

e.g. if a Michelin-starred restaurant refused an Amex card, it would experience a more precipitous drop in return rate than if a neighborhood diner refused Amex.

* "the business will only lose revenue from customers whose only form of payment is Amex" -> This is true on a per-transaction basis, but I defined "quality" to include repeat business and, per my first above point about business, restricting consumers could discourage repeat business.

It's not a zero sum game. As more mainstream consumers learn about and start using Square, it will undoubtedly give a great boost to small businesses using Square as well.