Evan Schuman's StorefrontBacktalk

I think it would be unlikely that any of the large corporate franchise chains would be open to prepaying millions of dollars in processing fees for their franchisees, even if it meant they could get a bigger discount. Even if you want to think that these actions are unrelated, how do you justify to your franchisees spending $25 million dollars to invest in a payment startup versus addressing declining customer counts?

Having negotiated several of these contracts over my career, I can tell you that the top seven priorities for this type of contract are typically (in this order):

1. Reduce costs
2. Decrease time to get the money from the sale
3. Reduce costs
4. Increase services (examples: system availability, customer support)
5. Reduce costs
6. Add additional services (example: loyalty)
7. Reduce costs

I would imagine that the existing relationship between Starbucks and Bank of America/First Data was already one of the industry’s best (financially, for Starbucks). For Starbucks to take the risk of switching processors (not a small project), there had to be a significant financial upside to the company. I would speculate that Square is giving Starbucks the processing costs for free, but I’m just not sure of its relationship with Paymentech and how that would work.

It should also be noted that Square merchants are charged a percentage (2.75 percent) of the transaction costs for “interchange.” It is unlikely that the contract with Starbucks is on a percentage basis and is, instead, likely to be interchange plus markup, as most major retailers are configured. If this is the case, I wonder how Square’s billing system can adapt easily (unlikely) or if Paymentech will handle the Starbucks billing.

I have said in the past that I think the payment industry is primed for a major disruption. Too many people are making too much money for executing very simple database transactions. I truly hope somebody can tear down the credit-card processing monopolies and create a system that is built around the realities of today. I think it is going to take a major disruption in the POS and payment ecosystems for that to happen. Unfortunately, I do not see the Starbucks-Square deal doing much in this area.

And yes, I understand that reports are that customers will eventually be able to use their Pay-By-Square application to integrate the Starbucks barcode with an open-loop card (Starbucks currently operates only with closed-loop stored-value cards). Although that may be great for a few Starbucks customers who don’t want to set up auto-reload on their giftcard, I just don’t believe it’s that big a deal. Even though the current program has been a success at Starbucks, you haven’t seen a flood of other restaurants or retailers follow suit.

What do you think? If you disagree (or even, heaven forbid, agree), please comment below or send me a private message. Or check out the Twitter discussion on @todd_michaud.