Merchant Switching CostsNarrow moat

On its own, a card terminal is easy to replace — a rival drops off a new machine and the merchant is gone. Stone's defense against that is to make itself into more than a terminal. Over time a merchant who stays accumulates a bundle: the payments account, the banking balance where his money now sits, the receivables Stone has advanced against, perhaps a working-capital loan, and the daily habit of running the business through Stone's app. Unwinding all of that to save a few basis points is a real hassle, and small business owners are busy people with little appetite for hassle.

The stickiest thread is money itself. Once a merchant's deposits and receivables flow through Stone, and once a loan is being repaid automatically out of his card sales, leaving means disentangling his cash flow and his credit — not a casual switch. Each additional product raises the wall a little higher, which is why the company works so hard to move a payments client into banking and then into credit.

None of this makes a merchant a prisoner. Switching costs in payments are moderate, not iron; a competitor with a compelling enough offer and enough patience can still win a customer away, and the more commoditized card acceptance becomes, the lower the walls. But the direction is right: a single-product terminal customer is a flight risk, while a merchant who banks, borrows, and runs his register through Stone is anchored. The company's whole strategy is to convert the former into the latter — 3.7 million banking accounts on from the card machine¹.