The problem with being so dependent on processing revenue is twofold: First, the profit margins aren’t great. Competition and the commoditization of payment pipes have driven down the fees payments companies charge merchants, while the cut paid out to credit card companies has remained largely the same. Secondly, the public markets today would likely be forced to value Square at a lower revenue multiple than if it made revenue from software sales, which typically come with better profit margins.
It’s not that the margins aren’t great, it’s that a merchant acquirer can only take so much off the top before either the merchants walk or Visa/MC/Amex lock you out. One of the great misconceptions of this investment cycle has been to treat processing volume as revenues (see: Uber, AirBnb, Square). But revenue isn’t the money a processor handles, it’s the money it handles *on which it has a claim.* Payment volumes make for misleading, but exciting, headlines, which is exactly why they’re used so often.