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Starbucks Mobile Deal Chops Its Card Costs

Written by Evan Schuman
August 9th, 2012

In the Square deal Starbucks announced on Wednesday (Aug. 8), the coffee company sharply cut its payment processing costs by turning over all of its U.S. credit- and debit-card processing to the Visa-backed Square. Although Starbucks wouldn’t comment on how deep the savings would be, some are suggesting that the processing savings—not the interchange fees—could be almost complete. Hey, a $25 million investment should be worth a little discount, no?

Also, despite what various media reports implied, when Starbucks starts accepting Square payments right before the holiday sales rush it will not be the mobile phone stays in the pocket customer identified by first name and a POS-displayed photograph approach that Square has done with a handful of smaller merchants. No, the Starbucks approach will mirror the exact method it’s been using for its own mobile payments for years: Customers will display a 2D barcode on their mobile phone, the Starbucks associate will scan that code, and then the store’s existing POS system will handle it normally.

This will not involve a Square sled, either on the customer’s mobile device or on a Starbucks mobile device, said Lisa Passé, director of global brand PR at Starbucks. The customer will have to download the Square app and that will be used to pay, with the displayed barcode being scanned by the Starbucks associate. “We will then be able to seamlessly integrate the Square app into our current point of sale system,” she said.

When asked if Starbucks might eventually adopt some of the more cutting-edge Square functionality, Passé said: “We haven’t talked about exactly what that experience would be.”

The program will also be limited to just the 7,706 U.S. company-operated stores (about 61 percent of all domestic locations) and not the 4,947 licensed stores, such as those in Target and various supermarkets. And Starbucks’ stored-value card—whether used through the plastic version or using Starbucks’ mobile app—is also exempt from this deal.

The deal also gives Starbucks a seat on the board of directors of Square, along with an unspecified equity stake. Whatever that stake was worth before, though, it’s likely worth a lot more now that Starbucks will accept this alternative payment in so many of its stores.

Todd Michaud, formerly VP of IT for Focus Brands (Carvel, Cinnabon, Auntie Annie’s, Seattle’s Best Coffee, etc.) and Director of Retail Technology for Dunkin’ Brands (Dunkin’ Donuts and Baskin-Robbins), knows the restaurant space well and he argues that this is an impressive endorsement of Square.

“So Square gets the absolute biggest merchant in the restaurant space (their core market), they get $25 million (more than a typical contract would have gotten them), a board member with tons of influence in their core market and free advertising at all Starbucks locations?” Michaud asked. “What’s not to love?”


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