Starbucks-Square Deal Says More About Square Than Starbucks

Written by Todd L. Michaud
August 15th, 2012

Todd Michaud runs Power Thinking Media, which helps retailers and restaurants tackle the convergence of social, mobile and retail technologies. He spent nine years delivering technology platforms to more than 10,000 retail locations as VP of IT for Focus and Director of Retail Technology for Dunkin’ Brands.

One of the things last week’s Starbucks-Square deal demonstrates is that Square found out just how hard it is to make a living selling services to small retailers and hotdog carts. For every coffee shop and dry cleaner that signs up to move their credit-card processing and POS to Square, there are likely dozens of other people who get a dongle strictly as a novelty. People like me, or the Girl Scouts, who use it one month a year selling a few hundred dollars worth of cookies. They are basically a next-generation ISO that is riding the wave of Apple-fandom to bring credit-card processing to the masses.

I think the Starbucks-Square announcement from last week has been overhyped and over-analyzed. It does not represent a large shift in the payment landscape. It does not mean a massive shift toward mobile payment. It does not mean anything more than that Square was willing to give up equity and a board seat to land a marquee client in an attempt to gain market share from the other big players.

Many media outlets seem to be splitting the credit-card acquiring and the $25 million investment in Square (and the associated board seat) into two separate things. In my mind, they are two sides to the same coin. I look at the $25 million as merely a prepayment on processing costs. In exchange for getting the money upfront, Square is offering equity and a board seat.

This is a win-win-win for Square. It gets a bunch of the contract value upfront. Square was supposedly in the middle of an investment round anyway, so why not take money from a company that would help it immediately gain credibility in its core market? The same goes for the board seat. I mean, wouldn’t you love to have someone on the board who knows your core market as well as anyone else on the planet with their own marquee name? (Quick, how many other restaurant CEOs can you name in the next 15 seconds without using the Internet to look them up?)

Over my career in the restaurant business, there have been several times that I have been in talks with startup companies about purchasing their services. When I expressed concerns about the size and stability of the startup and being able to deliver to such a large client, it was not uncommon for these startups to offer up a board seat in an effort to pacify those concerns.

There are several reasons why a deal like this could only be struck with Starbucks. First, Starbucks has a history of being extremely progressive with its payment ecosystem. From the combo closed-/open-loop cards to pay by phone, Starbucks has proven itself willing to take risks in payments.

I would also speculate knowledge sharing and technical access is part of this deal (or at least I believe it should be). I would hope that Starbucks now has access to more mobile-payment developers at Square and that Square now has access to a top-notch POS team at Starbucks.

Second, Starbucks is a large restaurant chain that is largely company-owned. I cannot tell you how significant this fact is. It would be nearly impossible to strike a deal like this in another large restaurant chain simply because of the nature of running a franchise business.

Remember that while card-processing contracts are negotiated at a corporate level, most franchise organizations have each operator sign an individual contract with the acquirer and maintain a financial relationship at that level (the money is moved between the operator and the acquirer, not the corporate entity).


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