Starbucks' Mobile Payment Deal and the Decline of Cash

Starbucks had already struck deals with Google and Apple to let customers use their technologies to buy coffee.

But this deal is different.

The coffee purveyor is not just making another mobile payment system available, it is investing $25 million in Square, the mobile tech company, and Starbucks CEO Howard Schultz is joining its board. Which is not just any old start-up collection of friends and relatives: it was founded by Twitter co-founder Jack Dorsey and other directors include Sun Microsystems co-founder, former Kleiner Perkins general partner and iconic venture capitalist Vinod Khosla, former Morgan Stanley analyst/tech guru Mary Meeker and former US Treasury Secretary Larry Summers. These are not the sort of people inclined to lend their names and time to ventures which have a small chance of success.

Starbucks processes about $1 million a week in mobile purchases. So, it has demonstrated both a market for - and a commitment to - the mobile payment concept. But with this investment it reinforces the notion that mobile is a strategic imperative, not just a convenient attention-getter.

The reason is that mobile may help the company address both its desperate need to reduce wait times in its stores, especially as prices rise, and it offers an alternative source of revenue and profit related to but not dependent on the sale of coffee. While many smart phone owners are reported to be positively inclined towards mobile payments, few actually do so. Starbucks' customers could provide the critical mass needed to kick-start this phenomenon. In doing so, it will strengthen its core business and benefit as an investor from the larger trend, enabling further investment in a growing array of allied enterprises.

The use of cash may or may not decline as a result. But its use will probably shift. Starbucks stands to benefit from a burnished reputation as a savvy investor - and as an operator with a strategic vision. JL

Peter Cohan reports in Forbes:

Mobile payments service provider, Square, got a $25 million investment from Starbucks valuing the start-up at $3.25 billion — that could mark the beginning of the end of cash. Meanwhile, this deal could boost Starbucks’ profits and puts Square’s competitors on notice.

Square has more than two million users of its small square credit and debit card reader that attaches to a cell phone. Square charges a fee of 2.75% of the transaction cost — it keeps some of that and passes the rest to the credit card company. And starting in the fall, Square will begin processing all credit and debit card transactions at 7,000 U.S. Starbucks stores.
But that is not the most exciting part. Square and Starbucks will eventually introduce a service that lets you pay by mentioning your name to the cashier. Square’s technology will signal through your cell phone that you’ve entered the store. The cashier will have access to your photo and name. When you mention your name, the cashier will approve your payment, reports the New York Times.

It looks like Starbucks’s decision to go with Square could mean that continuing work on Starbucks’s own mobile app is not the best use of its resources. After all, since 2011, Starbucks has been processing “more than a million mobile payments a week” with its home brewed app.

But Starbucks customers will also be able to use Pay With Square — a service that requires consumers to show the merchant a bar code on their phones before paying. Eventually, Square’s full GPS technology will allow those venti latte buyers to pay by saying their names, according to the Times.

While mobile payments seem incredibly compelling as an idea, they have not caught on quickly. The reason for that is pretty clear – vendors can’t win by selling to just one person. Gaining market share depends on convincing the entire payment network — including retailers, credit card companies, banks, cellphone carriers and phone makers – that mobile payment’s benefits to each of them will vastly exceed its costs.

And Square has been clever in overcoming the inertia in the payments system. That’s because it launched by selling to the 66% of 27 million small U.S. businesses that don’t accept credit or debit cards to avoid expensive payment processing fees, an annoying application process and required credit checks. These small businesses are clearly better off using Square’s service.

And using Square’s GPS technology looks like it would have the greatest additional benefit to high volume retailers like Starbucks. After all, when people are hurrying to buy their Frappuccino on a hot summer day before heading to work, Starbucks now loses customers who decide they can’t wait for the five people ahead of them in line to pay with their credit card.

If Square’s GPS technology cuts 40 seconds off of each of those transactions, that sixth person in line might decide to buy when he otherwise would have bolted. It’s not hard to imagine that multiplying those extra customers across U.S. stores every morning could yield significant additional revenues and profits.

When it comes to consumers, 30% of American mobile phone owners are “interested in using mobile payments,” according to a Forrester Research survey of 7,600 adults — with younger consumers most interested in them. But Forrester also concludes that it could be three to five years before such payments “reach critical mass.”

Meanwhile Square faces competition from Google (GOOG), PayPal, Sprint and Microsoft (MSFT) and start-ups like Scvngr/LevelUp and GoPago. My theory is that at this early stage in the industry’s development, these competitors are helping each other out because they are doing the missionary selling needed to make payment industry participants comfortable with the idea of mobile payments.

But Square’s deal with Starbucks puts it solidly in the post position in the mobile payments race. Rival merchants will be watching carefully to see whether mobile payments via GPS catches on at Starbucks. If it does so — while boosting Starbuck’s sales and profits — those merchants will be pushing for their own mobile payment service.

I am not holding my breath for this marking the end of cash. But its replacement with mobile payments could follow an S-curve. Young smart phone users could create an initial burst of demand followed by slower growth among older smart phone users. Eventually this could result in a much more marginal role for cash as mobile payments dominate.

Meanwhile, if Square catches on with the coffee purveyor, Starbucks shareholders will be enjoying much more valuable stock — including an explosion in the worth of Starbuck’s $25 million investment in Square.