Square VS Merchant Account: Which Is Better For Your Business?
Learn how to determine when Square is the best option for your small business and when it's time to get a merchant account instead.
Square is a popular payment processing platform that has revolutionized the industry by making it easy 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 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 also offer more flexibility and control than Square.
Ultimately, the best payment processing company for your business will depend on your individual needs and circumstances. If you are unsure which choice is right for you, this article can help you evaluate the pros and cons of each option, as well as show you how to determine whether Square or a full-service merchant account will be the most affordable selection for your business.
Table of Contents
- Square’s Merchant Services Aren’t The Same As A Merchant Account
- How Does Square Work?
- How Does A Merchant Account Work?
- Comparison: Key Differences Between Square & A Merchant Account
- Is Square Cheaper Than Other Merchant Services?
- Which Is Best For My Business Needs: A Merchant Account Or Square?
- Square VS Merchant Account: The Final Verdict
- FAQs: Square Merchant Services
Square’s Merchant Services Aren’t The Same As 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. 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 started out, it didn’t offer much beyond basic credit card transaction processing and a rudimentary reporting and analytics feature. Today, that’s no longer the case. Square has expanded its product and services lineup tremendously in recent years and 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 that 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:
|Aggregated account, no unique Merchant ID number||Full-service account, unique Merchant ID number|
|Pay-as-you-go billing||Fees are billed every month, even if you don’t process any transactions|
|No long-term contract or early termination fee||May include long-term contract (typically 3 years) and early termination fee (up to $500 on average)|
|No recurring monthly fees for a standard account||Multiple recurring monthly & annual fees|
|Predictable flat-rate pricing||Highly variable tiered, interchange-plus, or membership pricing|
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 any pricing information or contract terms on their websites, preferring to use a quote-based system that’s tailored to the size and needs of each business.
Fortunately, there has been a very positive trend within the processing industry in recent years to offer more transparency – particularly on rates and fees – to prospective merchants. 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.
Is Square Cheaper Than Other Merchant Services?
|Pricing Model||Flat-rate||Tiered, interchange-plus, or membership|
|Monthly Fees||None||Variable, usually at least $10/month|
|Early Termination Fee/Cancellation Fee||None||Variable, $0-$500 or higher|
|Hardware Options||Proprietary (can only be used with Square)||Usually universal (can be reprogrammed to work with a different provider)|
|Ideal For||Small or newly established business (less than $5K/month processing volume||Medium-large business (over $5K/month processing volume)|
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. Which option will be less expensive for you will ultimately depend not only on the nature and size of your business but also on what kind of rates and terms you are offered by a merchant account provider.
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,” take a look at 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.
Which Is Best For My Business Needs: A Merchant Account Or Square?
Choosing a payment processor for your business isn’t simply a matter of going with the cheapest option. You’ll want to also 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…
Square has proven to be 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:
- Part-time or seasonal businesses
- Businesses that only occasionally need to accept a credit card payment
- Small nonprofits
- Full-time businesses that typically process less than $5,000 per month
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:
- Full-time businesses that operates year-round
- Businesses that accept credit cards on a daily basis
- Large nonprofits
- Businesses that typically process over $5,000 per month
Square VS Merchant Account: The Final Verdict
Do we recommend Square for merchants? Yes, we think Square is right for many businesses. Do we recommend traditional merchant accounts? Absolutely. So which one is better? That’s hard to say.
When it comes to payments and 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. There are some undeniable facts: Getting a Square account takes much less time – but you may be sacrificing account stability. Customer service will always be better with a highly-rated payment processor. With Square, you don’t get a choice in what hardware or software you use; merchant accounts typically give you multiple options.
As always, the decision comes down to what stands to benefit your business the most. Weigh the pros and cons.