Why Square Won’t Issue A Long-Expected Credit Card

Payments-startup Square, whose card reader plugs into smartphones to let small merchants accept credit and debit cards, has decided against issuing its own brand of card, according to FastCompany.

Square has been testing the card over the past year by giving prototypes to employees to carry in their wallets. The prototype cards were all-black and did not display Square’s logo on the face of the card — showing nothing except the cardholder’s name. But after repeated queries, the magazine reported, “Square finally confirmed that it’s not launching a credit card.”

The most likely reasons for the project’s demise, according to the magazine’s sources: a Square card would risk angering Visa, MasterCard and the banks that issue payment cards; and it would potentially create many new legal requirements for Square.

The card project was essentially a physical version of Square’s Card Case digital wallet, which the company announced in 2011. Like digital wallets from Google, Isis and others, the all-digital version got little use from consumers and little interest from merchants.

But Square executives reportedly liked the idea of a plastic debit card that would be controlled by Square and thus cut out the interchange fees that had to be paid out of every transaction to card brands such as Visa and MasterCard, as well as to card-issuing banks. Square charges its merchants 2.75 percent of the value of each transaction, but most of that goes to interchange fees. As a result, Square’s card-processing business is only minimally profitable. The company lost $100 million in 2014, according to the Wall Street Journal.

However, if Square cut out interchange fees on a Square card, it would risk alienating the financial partners it still had to deal with to process transactions taken by merchants using its flagship product. Those partners might also resent the direct competition from Square. Major card brands could make rule changes that would effectively cut Square’s card out for merchants that accept Visa and MasterCard.

Square might also have been required to get a banking license, sources speculated to the magazine.

But if those were the top reasons for Square’s decision to stay out of the business of issuing payment cards, the current round of complications in the payment-card business might have carried at least as much weight.

Square is not alone in wanting to eliminate traditional interchange fees. A group of large retail chains led by Walmart has been working to develop an interchange-free payments system under the name MCX. Square would need the cooperation of those large retailers for its own card, and a Square debit card wouldn’t necessarily be accepted by other merchants either.

In addition, most large retailers are involved in long-running lawsuits over interchange fees with Visa, MasterCard and banks. Square’s risk of irritating those financial partners could spill over into the legal arena.

Another hurdle would be the shift to payment cards containing EMV chips along with magnetic stripes. Starting in October 2015, the cost of a fraudulent transaction will be borne by whoever has the lowest level of security, whether that is a merchant who cannot read EMV cards, a processor that can’t make use of its security features, or a card issuer that does not include an EMV chip. (Square announced in July that an EMV version of its card reader will be available later this year.)

Square may also have seen the risk of card fraud as too big a problem. After cutting traditional card brands out of the transaction process, it would be Square’s problem to decide would would have to swallow the cost of fraudulent transactions. While Square can dictate those terms to its existing small-merchant customers, as a card issuer it would have to negotiate with larger merchants, including the biggest chains.