Some of you may already know this, but most probably do not - Square's flat rate and no transaction fee pricing actually causes the company to lose money when it processes very small transactions.

Businesses that have an average sale of $5 will find Square to be very cost-effective and here is simple reason why.

Square must pay to the card issuing banks the interchange charges just like any other merchant service provider (Square is just a merchant aggregator), and interchange fees consist of a % rate and a transaction fee.

For example, a large bank charges an interchange fee of .05% plus a $0.22 transaction fee each time a business accepts a card it issued. Plus Visa / MC charge an assessment of another 0.11% and $0.02 in addition to the issuer's interchange fee. That is the total that what Square has to pay.

This makes Square's wholesale cost to process a debit card issued by a large bank 0.16% with a $0.24 transaction fee, or $0.25 (.0016 * 5 + .24 = .248) to process a $5 transaction.  Now Square's fee of 2.75% to process the transaction results in a charge to the business of only $0.14 (.0275 * 5 = .1375).

Square actually loses $0.10 on the transaction.

This is the real reason why Starbucks as mainly low value transaction merchant is so interested in working with Square ;-)

Feel free to comment.