Starbucks Approached Square After Rejecting Every Other Mobile Payment Player

By Erin Griffith , written on August 8, 2012

From The News Desk

Just when the mobile payment wars were heating up, Square dropped an A-bomb on the competition. Last night the payment processing startup, previously focused on small and very small vendors, announced a deal with Starbucks. Square will now process all credit and debit payments for 7000 US Starbucks stores. And Starbucks will invest $25 million into Square's latest monster round of funding. Celebratory frappuccinos all around.

At a press briefing this morning in New York, Square CEO Jack Dorsey and Starbucks CEO Howard Schultz described the partnership in more detail. The most notable piece of info was the way the deal came about: Starbucks approached Square, not the other way around.

Even though Square seems to benefit the most from having its services implemented in one of the largest retail chains in the world, it wasn't Square's idea. Starbucks had been approached by every one of the mobile payment processors in the last six months, Schultz says.

Before choosing one, Schultz decided to meet with Square, and the enviable deal was done. Starbucks will drive Square adoption by using it in its existing mobile payments app. Prior to this deal, mobile payments accounted for around 2 percent of sales at Starbucks.

It's a small percentage, but since implementing mobile payments 18 months ago, Starbucks loyalty card users have rapidly moved to mobile, Schultz said. "It's the fastest growing adoption of anything we've ever done," he said. Square's two million users will see Starbucks in their "Square directories" of nearby Square-enabled merchants.

This is the first technology investment ever for Starbucks, and it's the first time the chain has allowed another brand in its stores, a spokesperson said. In other words, this is a big deal for both parties. If Square didn't already have a big lead on its competitors, it does now.

Dorsey was quick to comment that Square won't lose its focus on small vendors--that's where it got its start--but a deal like this will likely lead to more inbound interest from national chains. "This partnership validated our ability to scale from an individual up to one of the largest companies in the world," Dorsey says.

Starbucks won't use Square's loyalty program. Yet, at least. The retailer has one of the country's most robust loyalty programs, as well as homebaked analytics and marketing technology. While Square offers its own solutions in these categories, it won't displace Starbucks's existing solutions at the moment.

Starbucks will "enjoy savings" on the cost of Square's payment services, but won't disclose which payments processor this deal displaces. Dorsey attributed is company's lower processing cost to Square simplification of transactions.

Implementation will begin by the holiday season. It'll be more simple for Starbucks than potential other large chains because Starbucks already has 2-D bar code scanners at all its Points of Sale, which are already compatible with Square.

Two notes about Square: One, the company doesn't view itself as a wallet. Square's primary goal is to be a tool for merchants, Dorsey says. "Square is all the merchants and services around you that you love. It's not about payments, but the experience and communication and relationship with those merchants."

And two, Square still isn't international. The company has around 75,000 merchants using it's services in the US. Most of the funding in its new round of venture backing, rumored to be worth $200 million and value the company at up to $4 billion, will go towards changing that, Dorsey says. Of course, this poses a quandary for countries with high percentages of "unbanked," since Square is only useful to people with credit and debit cards. Still, Starbucks has 18,000 stores in 60 countries, so the faster Square catches up internationally, the bigger the opportunity this is for them.

[Illustration by Hallie Bateman]