Evan Schuman's StorefrontBacktalk

Michaud argues that it’s likely Square’s processing fee for Starbucks is either zero or close it. Indeed, zero is probably cheaper for both Starbucks and Square.

Here’s Michaud’s rationale: “It’s not uncommon for the processing partner (like Square) to offer a ‘signing bonus’ to the merchant in exchange for switching from a previous provider. For someone like Starbucks, I would not be surprised if a processor offered a multi-million dollar signing bonus. In reality, this is just another way to discount the processing fees. But rather than give up a fraction of a penny on the billions of transactions, they simply give them a cut up front. Typical processing agreements are interchange plus processing fee. I would find it hard to believe that as progressive as Starbucks has been in the payment space in the last decade, that they would be paying more than a penny in processing fees and it’s likely as low as half a penny. Since the card brands set the interchange, the only place Square can really play is in the processing fee.”

Michaud adds that given that Starbucks has about $8 billion in annual revenue with a roughly—Michaud estimates—$6 average ticket, that suggests about 1.3 billion transactions. “If I then assume a 50 percent rate of credit cards vs. cash, that is $650 million in cash transactions. If they saved Starbucks half a penny on each transaction, that is only about $3.2 million. They are likely offering this deal to Starbucks for free processing in exchange for the $25 million investment. By my estimates, above a five-year contract at half a penny per transaction would only get them about $16 million. In effect, Starbucks is buying their processing down and getting the benefit of company ownership.”

In theory, this deal could have substantial impact in both Starbucks’ retail world and Square’s payment world. On the retail side, Starbucks’ endorsement of Square might make this alternative payment move seem less frightening to other chains. It’s also easier to sell to senior management being the third or fourth early adopter, rather than the first.

As for the payment world, payment consultant Todd Ablowitz, president of the Double Diamond Group, argues that it has some major potential.

“There will be an inflection point in the near future, where Square will have to decide whether to keep the experience solely on payment cards or whether to offer direct bank account access through ACH (like PayPal, for example) or Dwolla. This could be influenced by their interactions with major retailers, especially the Durbin enthusiasts,” he said. “I would imagine the pressure could be substantial and could include interactions with the much talked-about retailer consortium on mobile payments. If Square were to do this, it could put real pressure on the card brands over time, much as PayPal has done in the online business. That said, I’m not sure that the card brands are out of bullets, either.”