[Full disclosure: Stella Fayman works for FeeFighters, a marketplace that has partnered with lots of payment processors to provide merchant friendly terms and competitive bids to business owners. Square is one of many partners.]

Square burst onto the payments scene in 2009 promising both merchants and consumers the ability to collect payment by credit card quickly and easily using their smartphones.

Square’s likeable brand, attention to design, and emphasis on simplicity has made it spread like wildfire. Just last week, Square reported that its dongles (the hardware that attaches to Android or iOS devices to swipe cards) will be available at Wal-Mart for easier distribution to small businesses across the country.

In essence, Square replaces a traditional merchant account, sold to business owners by credit card processors. As Square begins to target businesses that are not early adopters, the question of whether they are the most cost effective solution for businesses becomes more ubiquitous. What types of businesses should opt for Square instead of a competitive merchant account?

Square prides itself on providing the simplicity of flat pricing: All transactions are charged 2.75% regardless of the type of the transaction or its size. This differs from a merchant account, which can often have confusing pricing. Although simplicity is nice, business owners care more about the bottom line.

Let’s take a look at some business cases and see how Square compares to a competitive merchant account. If you’d like to try some comparisons yourself, check out this nifty calculator from my own company (I know, shameless promotion!).

Here are four common business types: a coffeeshop, a boutique, a vendor at a market, and a restaurant.

In this scenario, Square really shines. Let’s say the average ticket size for a coffeeshop is $6 and it has 50 customers daily. Square’s per transaction cost is $0.17. A competitive merchant account would charge 1.73% and $0.21/transaction = $0.31. All told, monthly fees with Square would be $198, while the merchant account would be $417 (this includes the cost of a wireless terminal).
Verdict: The difference in cost is over $200 monthly, substantial for a coffeeshop. Since Square does not have a per-transaction fee, low ticket, high frequency businesses like coffeeshops should check it out. Take note: high frequency businesses have complained about Square’s dongle not working efficiently.

At this clothing boutique, the average ticket size is $200. Let’s assume it does about 10 sales per day and is open 6 days a week. Square’s cost for the $200 transaction is $5.50. The merchant account’s is $3.67. Here comes the whopper though: Square’s monthly total comes out to $1,320.00, while a merchant account’s is $921.47. That’s a difference of almost $400!
Verdict: High ticket size businesses don’t benefit from Square’s flat but high percentage rate. They can save money by shopping for a competitive merchant account.

Farmer’s Market Vendor
Let’s say a vendor at a busy farmer’s market wants to give his customers the option of paying by credit card. His average transaction size is about $15, and let’s say he makes 100 sales every Saturday for one month. Square’s cost per transaction is $0.47. The cost from a competitive merchant account? $0.56. Estimating the monthly cost including fixed costs: With Square, his cost would be $165. A competitive merchant account yields a monthly cost of $228.47.
Verdict: This is a scenario where Square wins in both convenience and cost. Here is the customer for whom Square is ideal: someone who wants the flexibility of accepting credit cards without the complications of a merchant account (think monthly fees).

This restaurant has an average ticket size of $40, and it goes through 60 checks daily. Square’s fees for one ticket are $1.10, while a competitive merchant account’s is $0.90. Total monthly cost for Square is $1,584, while the alternative yields $1,339.55. That’s a difference of $244.
Verdict: Traditional businesses should make sure to look for a competitive merchant account that yields a lower cost as well as more flexibility than Square (ie, can work with multiple POS systems).

One important thing to note is that the merchant account costs are based on a “competitive” account. The reason I stress this is that most business owners pay too much on their credit card processing costs because they get confused by fine print and fast-talking salespeople or too-good-to-be-true deals offered by Costco or Sam’s Club. Always compare at least several offers on an apples to apples basis, make sure to ask for interchange plus pricing, and don’t get locked into contracts with processors.

At the end of the day, merchants should do a comparison just like I did above and weigh the convenience of Square vs. the difference in cost with a traditional merchant account. Businesses with many small transactions should look at Square closely, while businesses with high average ticket size should get a competitive merchant account with interchange plus pricing.

If you’d like to see a copy of the spreadsheet where the math was done, feel free to email me at stella@feefighters.com

Stella Fayman is a founding member of FeeFighters, a comparison-shopping website for credit card processing.