{"id":14709,"date":"2023-12-05T07:19:14","date_gmt":"2023-12-05T13:19:14","guid":{"rendered":"https:\/\/reformingretail.com\/?p=14709"},"modified":"2023-12-05T07:19:16","modified_gmt":"2023-12-05T13:19:16","slug":"squares-canadian-pricing-looks-expensive-especially-in-cannabis","status":"publish","type":"post","link":"https:\/\/reformingretail.com\/index.php\/2023\/12\/05\/squares-canadian-pricing-looks-expensive-especially-in-cannabis\/","title":{"rendered":"Square&#8217;s Canadian Pricing Looks Expensive, Especially in Cannabis"},"content":{"rendered":"\n<p class=\"wp-block-paragraph\">In the fall of 2024 Canadian merchants will see <a href=\"https:\/\/www.canada.ca\/en\/department-finance\/news\/2023\/05\/government-announces-lower-credit-card-transaction-fees-for-small-businesses.html\">a decrease in interchange rates <\/a>thanks to years of government pressure on the credit card schemes.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The relevant pieces are below:<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><em>For qualifying small businesses, Visa and Mastercard have agreed to:<\/em><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><em>reduce domestic consumer credit interchange fees for in-store transactions to an annual weighted average interchange rate of 0.95 per cent;<\/em><\/li>\n\n\n\n<li><em>reduce domestic consumer credit interchange fees for online transactions by 10 basis points, resulting in reductions of up to 7 per cent; and,<\/em><\/li>\n\n\n\n<li><em>provide free access to online fraud and cyber security resources to help small businesses grow their online sales while preventing fraud and chargebacks.<\/em><\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\"><em>Small businesses will qualify with each credit card network individually. Specifically, small businesses with annual Visa sales volume below $300,000 will qualify for the lower interchange fees from Visa, and those with annual Mastercard sales volume below $175,000 will qualify for the lower fees from Mastercard. Non-profit organizations with transaction volumes below these thresholds will also benefit from reduced rates.<\/em><\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Canada estimates that this change will represent a 27% decrease in interchange costs, saving Canadian merchants a billion dollars over five years.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Canadian interchange is currently<a href=\"https:\/\/www.cbc.ca\/news\/business\/visa-mastercard-fees-1.6848082#:~:text=Currently%2C%20the%20average%20interchange%20fee,1.4%20per%20cent%2C%20Visa%20says.\"> 1.4% according to Visa<\/a>.<br><a href=\"https:\/\/squareup.com\/help\/ca\/en\/article\/5068-what-are-square-s-fees\">Square currently charges<\/a> 2.65% for credit cards, and $0.07 and 75 bps for Interac.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><img loading=\"lazy\" decoding=\"async\" width=\"624\" height=\"295\" src=\"https:\/\/lh6.googleusercontent.com\/KfNMLrhZZy_0bZzqpdjjpV_sGQglUWCYhBB_bQZk5e47ufK4gddC2PDyIwpDtU0elR1dH2GiS6sxhHZiWaA9ZMJYbRl-Y9f1N0Ll0zW_pnyhIGECgsWMjS3jY9tQbEngrjzVMQZjqV_5kb2R0pRDJDk\"><\/p>\n\n\n\n<p class=\"wp-block-paragraph\">This would net Square 125 bps of margin if we assumed 100% V\/M\/D payments.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">If the merchant was small &#8211; closer to Square\u2019s average of $300K GPV, then Square nets 170 bps of payments margin.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>But this gets really interesting in the Canadian cannabis segment where merchants are larger than Square\u2019s average merchant.<\/strong><\/p>\n\n\n\n<p class=\"wp-block-paragraph\">In Canada, consumers can legally use their credit card to buy cannabis. That\u2019s because cannabis is legal at the federal level, unlike here in America, where the banking laws around cannabis are a disaster.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">That aside, 70% of Canadian cannabis transactions are made with debit cards, which is wild.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Those smarter than us think they have the explanation.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Americans come across the border to buy cannabis. If electing to purchase cannabis with their credit card, which is permissible in Canada, Americans have been told they could be stopped at the border and prevented from returning home, as the digital transaction could be tracked and shared with US enforcement.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">And because Canada has been working to collect more statistics on their cannabis industry, they\u2019ve made paying in cash challenging.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><a href=\"https:\/\/www.ctvnews.ca\/canada\/buying-cannabis-with-a-credit-card-why-you-should-think-about-privacy-1.4182055?cache=yes\">Here\u2019s an article highlighting the concerns.<\/a><\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Hence the high use of debit, even for locals, which is even higher than it is for other discretionary industries like alcohol.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">In Canada, Interac is the national debit rail. <a href=\"https:\/\/www.interac.ca\/en\/business\/support\/understanding-fees\/\">Interac fees are reasonable<\/a> &#8211; $0.02 for a cannabis retailer so long as the transaction is under $100 (the average cannabis transaction from our experience is about $45 by the way, making Interac a 4.5 bps cost on interchange).<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Note that Interac also has something called a Switch fee, which is a flat fee the acquirer <em>and<\/em> issuer pay to use Interac, but it\u2019s $0.013 for <em>each<\/em> party, so it would add $0.026 to the above transaction, or 5.8 bps.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Here\u2019s a quick graphic of that payment flow from Interac:<\/p>\n\n\n\n<figure class=\"wp-block-image\"><img decoding=\"async\" src=\"https:\/\/lh5.googleusercontent.com\/XyDXmB6g6yrTvMW0rtw9v2EbDZ-FJYjM3b5q4-75TPV-hpckyzCqHy80x2JcYXQj3MSG3pYQy9rVJljMsSjFdcHVqv0-f92yySxFE6_mDq6gvGOmFxbWpnmv1UbAC-E8TH_AkVRb6pcTDFgLHVnbhzE\" alt=\"\"\/><\/figure>\n\n\n\n<p class=\"wp-block-paragraph\">And Interac has no limit on surcharging.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">\u201cAs prescribed by the Interac Consent Order issued by the Competition Tribunal, Interac Corp. may not restrict the levying of a surcharge. If imposed, the surcharge amount must be properly disclosed to the customer, and the customer must be provided with the option of cancelling the transaction without cost if they do not wish to pay the surcharge.\u201d&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Knowing all this, it makes Square\u2019s cannabis pricing look even more expensive if Square determines to uphold its current rates.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The average Canadian dispensary does about $1.2M CAD in sales (divide <a href=\"https:\/\/www.statista.com\/statistics\/1216276\/annual-cannabis-store-sales-canada\/\">$4.5B in revenue<\/a> by <a href=\"https:\/\/mjbizdaily.com\/canadian-cannabis-stores-by-provinces-territories\/#:~:text=As%20of%20late%20April%202023,residents%20at%20the%20national%20level.\">3,700 stores<\/a>). If 70% is debit, that means $360K is credit, which among Visa, Mastercard, and Discover would mean that this merchant will see interchange costs of 95 bps since it\u2019s under the new caps.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">So the cost to support the merchant would be 0.0095 * $360K = $3,420.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">And for Interac, it would be $373 &#8211; we get that by taking the 70% of $1.2M, dividing by an average transaction of $45 and multiplying it by $0.02 per transaction.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Total cost is $3,793.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Following the above example, that would net Square 1.7% on the $360K in volume = $6,120.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">And for Interac, it would be $0.05 on 18,666 transactions = $936.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Plus 75 bps on $840K of volume = $6,300.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Grand total, Square would <em>net<\/em> $13,356 which is 111 bps or 1.11% effective.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Steep.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Here\u2019s a graphic that was once shared with us. Unfortunately we forget the source, so we can\u2019t give them due credit.<\/p>\n\n\n\n<figure class=\"wp-block-image\"><img decoding=\"async\" src=\"https:\/\/lh6.googleusercontent.com\/01YJlC9XNTgkjxNlGxS87DOE299D9lNYNWzkedf30nVQFQX9pUISSYaE7z00WWytx3IMGJFs23P9kLvXZ0L55-QDbnwvsQvSFA_vJDZtcGub5uuB-39Nx4gcMQP8Ms-FAEk-4_12OHIS0ydCqkxVAKw\" alt=\"\"\/><\/figure>\n\n\n\n<p class=\"wp-block-paragraph\">This shows you expected payments margin as a function of merchant GPV.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The example Canadian dispensary is really a $1M GPV business because we should convert CAD to USD.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">This merchant should be paying no more than 40 bps using this chart.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">So is Square giving the merchant the POS for free to justify their rates?<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Square tells us that their Canadian Retail solution for cannabis dispensaries is currently in alpha\/beta testing (limited to Ontario only) and has not yet launched to general availability. Accordingly they are still determining pricing.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">But this just feels really high.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">For instance, Cova, another cannabis POS provider, recently <a href=\"https:\/\/www.prnewswire.com\/news-releases\/cova-launches-its-own-cannabis-payment-solution-to-set-world-class-standard-in-canada-301854972.html\">stepped into payments<\/a>.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Like Square, it would seem they are also experimenting with different pricing, with rates that range from 2.1% and $0.15 for VMD to 2.4% and $0.15 (these are no longer publicly available on their site and were grabbed using site caching).&nbsp;<\/p>\n\n\n\n<figure class=\"wp-block-image\"><img decoding=\"async\" src=\"https:\/\/lh3.googleusercontent.com\/1jWxi20h0XJ9imDKxUVIHt_YnXg53yasaSURP5euEJlO60sfljnBJJlcbPgn80qV1J8Nf0eL5bsqD4yb-Tr9mvB8jehdxUugXNe3HeiiIREoQ7YRexwks-Y2UzBSDKtV0wObte0wdDh7RTnHywFgijY\" alt=\"\"\/><\/figure>\n\n\n\n<figure class=\"wp-block-image\"><img decoding=\"async\" src=\"https:\/\/lh3.googleusercontent.com\/7E9AsdODeV4zsecKbDPXxW7Tx4yqPI26HmzSKguy0Y1JNLiQnDhI20jwSpvRcfumzvivaAVFzvNckpDzfrlwof3c7qMd-VcZbTZum39XYRsQIfGjTEqpgtZgE0WCdnMoa_CWcTba5iDihOyAgCMPml4\" alt=\"\"\/><\/figure>\n\n\n\n<p class=\"wp-block-paragraph\">But Cova\u2019s proposed pricing is still multiple thousands of dollars cheaper than that of Square.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">For instance, assuming Cova\u2019s highest rate, Cova nets $7,913 annually, while on their cheapest plan it\u2019s $6,833 (100% Interac debit with no tap payments).<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">In either case, Cova\u2019s proposed net margin is 51% &#8211; 59% of Square\u2019s proposed net margin.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Square has a lot to think about.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>In the fall of 2024 Canadian merchants will see a decrease in interchange rates thanks to years of government pressure on the credit card schemes. The relevant pieces are below: For qualifying small businesses, Visa and Mastercard have agreed to: Small businesses will qualify with each credit card network individually. Specifically, small businesses with annual [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":14712,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"image","meta":{"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_feature_clip_id":0,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","default_image_id":0,"font":"","enabled":false},"version":2},"jetpack_post_was_ever_published":false},"categories":[5,4,3],"tags":[],"class_list":["post-14709","post","type-post","status-publish","format-image","has-post-thumbnail","hentry","category-solutions","category-merchants","category-pos","post_format-post-format-image"],"jetpack_publicize_connections":[],"jetpack_sharing_enabled":true,"jetpack_shortlink":"https:\/\/wp.me\/p81nA2-3Pf","jetpack_featured_media_url":"https:\/\/i0.wp.com\/reformingretail.com\/wp-content\/uploads\/2023\/07\/Screen-Shot-2023-07-12-at-11.05.10-AM.png?fit=1700%2C802&ssl=1","_links":{"self":[{"href":"https:\/\/reformingretail.com\/index.php\/wp-json\/wp\/v2\/posts\/14709","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/reformingretail.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/reformingretail.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/reformingretail.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/reformingretail.com\/index.php\/wp-json\/wp\/v2\/comments?post=14709"}],"version-history":[{"count":2,"href":"https:\/\/reformingretail.com\/index.php\/wp-json\/wp\/v2\/posts\/14709\/revisions"}],"predecessor-version":[{"id":14713,"href":"https:\/\/reformingretail.com\/index.php\/wp-json\/wp\/v2\/posts\/14709\/revisions\/14713"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/reformingretail.com\/index.php\/wp-json\/wp\/v2\/media\/14712"}],"wp:attachment":[{"href":"https:\/\/reformingretail.com\/index.php\/wp-json\/wp\/v2\/media?parent=14709"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/reformingretail.com\/index.php\/wp-json\/wp\/v2\/categories?post=14709"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/reformingretail.com\/index.php\/wp-json\/wp\/v2\/tags?post=14709"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}