Starbucks is getting it right through Square

Submitted by Alessandro Longoni on Fri, 08/10/2012 - 12:41 in
Alessandro Longoni's picture

Square and Starbucks just announced their partnership to ‘revolutionize’ in-store payments at the coffee house locations. 

The deal will see Starbucks processing all its credit card transactions through an ad-hoc square solution, considerably reducing credit card swiping costs – Starbucks CEO Howard Schulz said.

Square, on the other hand, is enjoying a $25 million investment from Starbucks, and will deploy its solution in more than 5,000 additional locations across the US, effectively expanding its geographic coverage.


The move, however, surprised more than one person interested in mobile payments: Starbucks is known for having designed the most successful in-house developed mobile payment solution that enables its customers to link their prepaid store cards to the mobile app, and use their phone to pay at the counter. 

Starbucks processed more than 26 million payments last year through its Starbucks Card App (which also boosts a fine design and user experience), and its prepaid cards were reloaded with more than $820 million, a figure that dwarfs many other mobile payment solutions.

Starbucks launched its mobile payment program in the US In January 2011, reaching the 3 million user milestone in March 2011

“The 20 million mobile payments made at Starbucks stores in fiscal 2011—plus another six million by December’s end—were fueled by our hugely popular Starbucks Card Apps for the Android™ and iPhone,® once again reflecting our ability to respond to the constantly changing marketplace in ways that strengthen our connections with customers” - 2011 Starbucks Annual Report

What is important to mention about the deal, is that with this new partnership, Starbucks is hindering its own baby, enabling consumers to shift away from its extremely successful store cards and mobile apps, to a third-party developed solution. In return, Starbucks is not only getting cheaper credit card swiping fees but, most important, access to a wealth of possible value added services that Square already offers to its customers, such as geo-localized offers and rewards, but also detailed buying behaviour. 

Last but not least: Starbucks is acknowledging the fact that their customers also buy at other places, even at competitors. Via the more generic solution of Square, they are getting closer to the actual customer needs. Customers do not need merchant specific payment solutions  in order to embrace new innovative products, customers need to clearly see the benefits of those solutions. In this case the benefits are represented by tailored offers and rewards, that can be received (if desired) straight through the mobile phone and redeemed automatically at checkout.

This kind of user experience is enabled by the fact that mobile payments are morphing into ‘card in the cloud’ or ‘account in the cloud’ (i.e. wallet), with the mobile phone used as an access device, always connected.

Let’s talk about a very possible scenario: a loyal Starbucks client is walking down the street on a hot summer day, when she receives a notification for a discount on her favourite Tall Skinny Frappuccino, with directions to the closest Starbucks store. She accepts the offer, walks into the store and the barista already has the drink ready, together with loyalty points to stimulate coming back another time.

This marketing trend, recently dubbed ‘Closing the loop’, is one of the key topics that are driving merchant’s interest in mobile payments. This topic will also be discussed in more depth in Innopay’s next publication: the Mobile Payments Report 2013, out next month.

This kind of personalization should be at the top of the priorities list for retailers in developed countries, and a solution like Square (or PayPal, that has a VERY similar approach) could enable it pronto.

The only issue that Square still needs to solve, is how to get all of us to reach for our phones, not our wallets when we’re required to pay. But that’s not a big deal, as research shows


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