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Starbucks teams up with Square, will accept Pay with Square

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Square, the San Francisco-based mobile payments company co-founded by Twitter founder Jack Dorsey, has signed a wide-ranging agreement with coffee chain Starbucks (s SBUX) and as part of this agreement, Starbucks will be able to accept payments from Square’s Pay with Square application. As part of this new deal, Square will also process Starbucks’ U.S. credit card and debit card transactions.

Starbucks is going to invest $25 million in Square as well. Prior to the Starbucks agreement, Square was said to be valued at $3.2 billion valuation and was rumored to have raised $200 million in funding. Here are the partnership terms from the press release jointly issued by two companies.

  • Customers will be able to use Pay with Square, Square’s payer application, from participating company operated U.S. Starbucks stores later this fall, and find nearby Starbucks locations within Square Directory;
  • Square will process Starbucks U.S. credit and debit card transactions, which will significantly expand Square’s scale and accelerate the benefits to businesses on the Square platform, especially small businesses, while reducing Starbucks payment processing costs;
  • Using Square Directory, Starbucks customers will be able to discover local Square businesses — from specialty retailers to crafts businesses — from within a variety of Starbucks digital platforms, including the Starbucks Digital Network and eventually the Starbucks mobile payment application;
  • Starbucks will invest $25 million in Square as part of the company’s Series D financing round;
  • Starbucks chairman, president and ceo Howard Schultz will join Square’s Board of Directors.

This is a significant boost for Square which has been in competition with the likes of eBay’s (s EBAY) PayPal division. Square, which was started to tap into the growing people-to-people economy, has broadened its ambitions. Signing up Starbucks can be viewed as a big part of the company’s desire to go after bigger retailers in addition to independent retailers.

The deal gives Starbucks another way to accept payments in store at its 7,000 U.S. locations. It currently has a successful mobile payment system based on barcodes. But now, it will have a way for Pay with Square users to pay at the register using their phone. Pay with Square allows users to open a tab at a business and pay by just using their face, which an employee can recognize on their Square Register iPad app.

It’s a big win for Square, showing how it can move up into big retail. Here’s what Square CEO Jack Dorsey said in a letter:

Square began with a really simple idea: everyone should be able to accept credit cards. It should be easy and free to get set up, it should use simple technology people already own, and, most importantly, it should instantly adapt to any size business—from the person chasing a dream to the largest organization on the planet. By embracing Square, Starbucks has validated these ideas as powerful tools—not just for small businesses, but for smart businesses.

6 Responses to “Starbucks teams up with Square, will accept Pay with Square”

  1. Ilene Kaminsky

    Starbucks investment in Square perhaps looks like a marketing deal at first glance. However, If you want to call it a marketing strategy or a brilliant business strategy it would be less easy to prove its value to the street. It’s both of those as well as a way to significantly reduce the cost per customer to serve without losing any customer experience points (and maybe even gaining customer satisfaction) and operational efficiency driver at the store level where retailers have less control over the process.

    The economics make sense on several levels – to reduce the overhead associated with a high-volume, low average cost per transaction “last-mile” local business. And the demographic is such that consumers likely use their bank debit card or credit card to pay for their latte. Take that cost and I’m guessing here – but add 5% to the total revenues received across those thousands of stores in the US alone and… you can do the math.

    My opinion is that Starbucks will use it’s newly formed payment alliance with Square to monetize the last-mile network of very small businesses, which are comprised of of sole proprietors and mom-and-pop shops and their potential local customer base. Starbucks customers likely wouldn’t know all of the people within a mile to two radius around their local Starbucks – where so many opportunities for commerce live and work. If they can do it, and if anyone can they have the best distribution model to make it happen – then the Starbucks Digital Network and the forthcoming application for mobile payments becomes a very good “local Square business” through the “Square Directory.”

    The very small and small business market opportunity which still makes up a huge amount of the US business revenues is one huge opportunity code that’s not been cracked yet – although PayPal comes remarkably close. It would appear that Starbucks and Square have done just that. Now they just have to market and position it properly.

  2. Adam Block

    This is a marketing deal. The other “benefits” listed in the press release bullet points are red herrings, and I agree with Om and Justin that there is no way that adding another layer between the retailer and the merchant account provider can somehow make things cheaper.

    But as a marketing deal, it’s brilliant. Obviously small business owners shop at Starbucks; everybody shops at Starbucks. A traditional marketer working at Square would therefore see Starbucks as a distribution channel for Square’s *information* — features, benefits, perhaps a discount offer or even the little reader dongles themselves. Put ’em at the POS; done!

    This deal turns that approach on its head: SBUX isn’t a distribution channel for Square’s marketing information; it’s is a distribution channel for the technology itself. Small business owners don’t get exposed to Square’s marcomm when they buy that vente pumpkin latte — they get exposed to the user-side experience of the Square reader or Pay With Square, and can extrapolate from there what their own business would gain from adopting Square.

  3. justinbenson

    The initial advantage Square had was “green fields” Most of their customers didn’t accept Credit Cards so they did not have incumbency issues. That’s what makes this win impressive. However, it also highlights just what Square has to go through to win a very large account. SB’s had to agree to tear out and replace their existing POS system. That’s a big risk, headache and cost and customers will use that leverage (and genuine pain) to drive hard bargains.

    Also worth noting is that SB’s mentions processing costs will be cheaper. It’s hard for me to imagine that SB was overpaying by very with their last vendor so I worry about the economics on this deal. Maybe it’s the anchor tenant though that allows for additional enterprise deals to follow so is worth it.

    • Justin
      +1 to everything you said. And I would check in on the actual dynamics of the rollout and keep you posted. I bet you they (Square) are for now eating all those costs. However, this deal can provide Square’s “Pay with Square” momentum in the market.

  4. Alek Hartzog

    Yeah “Swipe” by Appninjas is still a far superior solution for anyone. And no I’m not associated with them at all, just someone who did research before committing to a stupidly high transaction fee.