The payments start-up Square has been considered one of the hottest young companies in Silicon Valley, with a multibillion-dollar valuation. But it now appears to be facing some growing pains.
The company is losing money and recently discussed a possible sale, according to a report on Monday in The Wall Street Journal. The predicament points to the broader challenges of making money in the highly competitive world of payments.
The chief difficulty for Square and similar companies is that margins in this business can be extremely thin or even nonexistent, said James Wester, a research director at IDC, a technology advisory firm. A number of parties, including banks and credit card companies, collect payments when a customer swipes a credit card, raising the question of how a company like Square makes itself into more than just another middleman.
Square has not publicly answered that question in detail, though its chief executive, Jack Dorsey, has said that it is expanding beyond payments to become more of a diversified commerce company.
“It’s just a stark reminder that in payments, you really have to have everything working exactly right,†Mr. Wester said. “Just disrupting payments isn’t necessarily enough.â€
One important laboratory for Square is Starbucks, which struck a prominent partnership with the company in 2012. Starbucks invested $25 million in Square and now relies on the company to process all of its transactions on the back end.
Starbucks says that the arrangement saves it money, reducing its fees on debit and credit cards in the United States. But Starbucks has not disclosed the details of the arrangement.
A clue, according to The Journal report, is that Square actually loses money on the deal. Last year, the report said, Square lost at least $20 million through the arrangement, almost as much as Starbucks’ original investment.
A spokeswoman for Starbucks declined to comment on Monday.
Square says that it processes tens of billions of payments a year, not including the Starbucks arrangement. Customers using Square Cash, a money transfer service introduced in October, send millions of dollars to each other every week, according to the company.
The company also recently struck a partnership with Whole Foods, though it is significantly more limited than the Starbucks deal. Under the pact, customers at certain Whole Foods stores can use a Square app to pay for items at “in-store venues,†like sandwich counters and juice bars.
But questions remain about Square’s corporate strategy, including whether it will pursue an initial public offering. The company secured a line of credit this month from banks led by Goldman Sachs, according to a CNBC report, a move seen as a possible prelude to an I.P.O. or other transaction.
But with mounting losses, representatives of Square also considered a possible sale, The Journal reported. Google discussed the possibility of buying the company this year, the report said, citing three unidentified people familiar with the matter.
In a statement, a Square spokesman said: “We are not, nor have we ever been in acquisition talks with Google, and while we appreciate that Square may be an attractive target for some companies, we have never seriously considered selling to anyone or been in any talks to do so.â€
A Google spokesman declined to comment.
Google has its own payments business, known as Google Wallet. But a sale would not necessarily resolve Square’s challenges.
“It’s not as if the problem goes away,†said Roger L. Kay, president of Endpoint Technologies Associates, a technology research firm. “It just becomes internal to Google.â€
