Square (SQ) and Stripe have emerged as two popular payment processing services for small and growing businesses. As the services have become widely used, their simple fixed-rate payment processing fees have drawn in big-name supporters, such as Starbucks (SBUX), to use and promote their systems. For investors and business owners, it’s important to understand how these companies operate to make smart financial decisions in the rapidly shifting payment processing industry.

How Square Works

Co-founded by Jack Dorsey, a founder of Twitter (TWTR), in 2010, Square began as a mobile payment processor for small businesses that operate on the go. The company initially targeted service-based businesses such as plumbers, food trucks, and pedicabs, offering its service as a way to safely, quickly, and inexpensively accept credit and debit cards. Square became popular thanks to its free and convenient adapters that operate through a phone’s headphone jack, a flat-rate 2.75% processing fee, and no monthly recurring service fee.

Key Takeaways

  • Stripe and Square are payment processing companies for small and growing businesses.
  • The companies are disruptors in the space, which has long been dominated by large banks.
  • Founded in 2010, Square is known for its adapters that plug into mobile-device phone jacks.
  • Stripe is predominantly used for online debit and credit card transactions.
  • While Square raised money through an initial public offering in 2015, Stripe says it has no IPO plans.

Square has been widely adopted by mobile and brick-and-mortar businesses alike. To further extend its reach among the latter, Square released a physical Square Stand in May 2013 that transforms iPads into traditional cash registers. The company has also built out its software suite to better handle diverse product sales from a predefined menu or inventory. Later product additions include inventory management, appointment management, analytics, invoicing, online ordering, gift cards, and capital management tools.

In Oct. 2013, Square launched Square Cash as a person-to-person mobile payment platform. The company had an initial public offering in 2015 and raised $1.9 billion, with shares trading on the New York Stock Exchange under the ticker symbol SQ. That same year, the firm launched Square Payroll, a tool for small businesses to process payrolls. In 2018, Square began offering an application programming interface (API) to allow merchants to customize the Square platform.

How Stripe Works

What Square is to mobile payment processing, Stripe is to Internet payment processing. Stripe, which was founded in 2009 by two Irish entrepreneurs, charges 2.9% plus .30 cents per transaction with discounts available for high volume clients. Like Square, Stripe doesn’t have any monthly service fees and only charges business owners when a payment is processed.

Stripe, which was designed with online developers in mind, makes it easy to integrate a variety of online payment processing tools and plugins through its API. Sites on common platforms like Wordpress, Drupal, and Joomla can use Stripe for invoice payments, ticket sales, and physical goods sales, among other applications.

Stripe wasn't intended for in-person payments and focused on online transactions. These payments have a higher probability of fraud than in-person methods, which explains Stripe’s higher cost per transaction. However, in 2018, the firm launched a point of sale solution called Terminal, which provides credit and debit card readers that work with Stripe.

In 2019, Stripe raised $100 million from investment firm Tiger Global Management, increasing the company's valuation to $22.5 billion. In contrast to Square, Stripe says it has no intention of going public.

Similarities and Differences

Another major difference between the two payment processors is how the payment information is acquired. Square is primarily used for in-person payments where the card is present and can be physically swiped through a card reader. The company has announced plans to offer an EMV chip reader in the coming months as well. Prior the the launch of Terminal in 2018, Stripe was used primarily for Internet transactions where the card isn’t physically present.

Both companies target similarly sized businesses that do not want to pay monthly transaction fees and do not want to be burdened with expensive payment processing equipment or complex contracts. Both companies offer similar, automated direct deposits within a few days of processing each transaction, so clients will have fast access to cash after each payment takes place.

The Bottom Line

Square and Stripe are major disruptors in traditional payment processing, a space long dominated by large banks. Overturning the traditional monthly merchant account fees and transaction fees allows many more businesses to access credit and debit customers, further shifting the competitive landscape from traditional businesses to startups and growing small to medium-sized companies.

As these companies continue to innovate, consumers and business owners can expect further changes that will make payment processing easier and more accessible. As cash becomes less prevalent and consumers continue to shift towards plastic en masse, these electronic payment processing companies can be expected to grow and more competitors are likely to enter the space.