Square VS Merchant Account: Which Is Better For Your Business?

What is Square, and is it the best option to accept payments for your small business?

Square has revolutionized the payment processing industry by making it easier for small businesses to accept credit cards. Gone are the days of long-term contracts, byzantine pricing plans, hidden fees, and expensive equipment. Square offers a simple, technology-based solution that is perfect for new businesses or small businesses that need a convenient all-in-one solution.

However, as your business grows, you may find that Square’s flat-rate pricing structure becomes too expensive. In this case, a full-service merchant account may be a better option. Merchant accounts offer a variety of features and pricing options that can be tailored to your specific needs. They can also offer more flexibility and control than Square.

Ultimately, the best credit card processing company for your small business will depend on your individual needs and circumstances. Here, we’ll help you evaluate the pros and cons of each option, allowing you to determine whether Square or a full-service merchant account will be the better selection for your business.

How Square Differs From A Merchant Account

With Square, there’s no application fee, and anyone is welcome to open an account. Square will ask you for some basic information about your business and verify your identity, but you won’t have to undergo an extensive underwriting process before being approved for an account. Instead, you’ll be up and processing within a few days.

On the other hand, obtaining a merchant account is much more complicated. The applications themselves are often quite streamlined, but you can expect the process to take longer. Part of this is because the processor’s underwriting department will scrutinize every aspect of your business to decide just how likely they are to encounter chargebacks (learn how to prevent chargebacks), claims of fraud, and everything else that processors hate to deal with. You might have several back-and-forths with a representative before you get approved for an account.

In this respect, Square is more advantageous for small or new businesses.

How Does Square Work?

When Square first launched, it offered little beyond basic credit card transaction processing and a rudimentary reporting and analytics feature. Today, Square has expanded its product and services lineup tremendously. It now offers just about every conceivable feature that you could expect to find with a traditional merchant account provider.

How Does A Merchant Account Work?

With all these services available, it’s easy to think of your Square account as a merchant account. However, that’s not really the case.

Square is a payment service provider (PSP), meaning it can process your credit card transactions, but doesn’t provide you with a true, full-service merchant account. Instead, your account is aggregated with those of other users into a single, huge merchant account.

The advantages of this approach include a fast, streamlined account approval process and the fact that Square handles all PCI compliance requirements for you at no additional cost. The primary disadvantage is that, because your business hasn’t been subjected to the usual thorough vetting process that’s needed for a merchant account, the possibility of a sudden account hold, freeze, or termination is significantly higher.

Comparison: Key Differences Between Square & A Merchant Account

Although both Square and a traditional merchant account allow you to accept credit and debit card payments, there are significant differences between them. The table below summarizes the most important differences you need to be aware of in deciding which option is best for your business:

In addition to these considerations, one of the primary differences between Square and traditional merchant accounts is that with Square, everyone is offered the same terms and prices. This isn’t usually the case with merchant accounts, where contract terms, fee schedules, and processing rates will all vary from one business to the next and can be adjusted in your favor with some aggressive negotiation.

Most traditional merchant account providers don’t disclose pricing information or contract terms on their websites, preferring to use a quote-based system tailored to each business’s size and needs.

Fortunately, there has been a very positive trend within the processing industry in recent years to offer prospective merchants more transparency—particularly on rates and fees. Most of our top-rated providers now provide extensive disclosures of processing rate plans, fee schedules, and contract terms right on their websites.

Merchants trying to decide on a provider can easily compare their estimated costs with what Square would cost them. For many small businesses, Square will indeed be the cheaper option. However, at higher processing volumes, the significantly lower interchange-plus rates offered by a full-service merchant account provider will prove to be the better bargain, even with the additional monthly and annual fees factored in.

Note that if you’re in a high-risk industry, your choices will be much more limited. Square’s Prohibited Use Policy essentially blocks almost all high-risk merchants from using it. The sole exception is a special program for CBD businesses, which comes with much higher processing rates than those offered to low-risk businesses.

Many full-service merchant account providers don’t accept high-risk businesses either, so you’ll have to seek out one of the best high-risk merchant account providers to get credit card processing for your business.

Is Square Cheaper Than Other Merchant Services?

The table above summarizes the main differences between Square and a traditional merchant account. As you can see, Square differs from most merchant account providers in one very significant way: transparency. While merchant account pricing and contract terms can be highly variable, Square offers you all the information you’ll need to make an informed decision upfront. Your least expensive option will depend not only on the nature and size of your business but also on the rates and terms offered by competing merchant account providers.

As a very general rule, Square usually costs less overall if your business processes less than $5,000 per month in credit and debit card transactions. Above this amount, a good merchant services provider can be less expensive. However, it’s important to remember that the $5,000 figure is nothing more than a very general average. We’ve seen figures as low as $1,500 per month and as high as $10,000 per month as the suggested “tipping point” where a merchant account makes more sense.

Coming up with a reasonably accurate “tipping point” for your business is something that only you can determine, based on your needs and variables such as your monthly processing volume, average ticket size, etc. If you need some help with “doing the math,” we highly recommend our e-book, Don’t Overpay For Credit Card Processing: How To Find A Great Merchant Services Provider & Lower Your Costs, for a detailed explanation (complete with spreadsheets) about how to estimate your total costs with Square or a competing merchant account provider.

Note: In an effort to address the potentially high cost of its flat-rate processing for high-volume businesses, Square also offers customized pricing for merchants processing over $250,00 per year. While it’s uncertain what type of processing rates are offered or whether you’ll have a fully underwritten merchant account, your processing rates should be significantly lower than the standard ones advertised on the Square website.

Which Is Best For My Business Needs: A Merchant Account Or Square?

Selecting a payment processor for your business isn’t simply a matter of choosing the cheapest option. You’ll also want to factor in other considerations, such as the availability of ancillary services, hardware and software options, and (most importantly) the quality of customer support.

Choose Square If…

Is Square right for your business? It’s been an affordable option for millions of users over the years, and the company’s ever-expanding line of products and services makes it a solid alternative to a traditional merchant account. It’s also a great option for very small businesses that otherwise wouldn’t be able to afford a full-service merchant account. You’ll usually find Square to be the better choice in the following use cases:

Choose A Merchant Account If…

As great as Square is, it’s not the best option for everyone. A larger, more established business will generally be better off with a true merchant account due to the lower processing rates, availability of more sophisticated hardware and software, improved account stability, and generally better customer support. You should choose a merchant account (from a top-rated provider) if the following criteria apply to your business:

In the world of payment processing, there is no one-size-fits-all solution. The age of your business, its size, your industry, and even how you operate daily all factor into choosing a payment processor. It’s quicker to get started with Square, but you may be sacrificing account stability and responsive customer service. As always, the decision comes down to which option offers the most overall value for the best price.