Starbucks and Square: Creating a 'virtual currency'

The partnership has received scant attention, given its potential to connect the digital world with the real world in trail-blazing ways.

By TheStreet Staff Jan 17, 2013 4:54PM

mobile paymentsBy Dana Blackenhorn, TheStreet

Since summer, when Starbucks (SBUX) announced its partnership with mobile-payment start-up Square and began rolling out Square's digital wallet application to 7,000 coffee shops, the story has gone as cold as hour-old coffee.

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But if you're into investing in such areas as transaction processing, big data or even social marketing, it's time to take notice. Because this hits all of those buttons.

 

The transaction-processing button is easy to describe. Until now this has been a cozy relationship among merchant processors, their resellers and banks. Merchants signed agreements with resellers, approved by their banks, and the resellers delivered software and terminals while the processors handled the back end.

 

All this changes with Square. Square handles the processing, there is no reseller and the money goes into the merchant's bank transparently. 


This lets Square offer a single deal with a single transparent "discount" fee, 2.75%, as opposed to the numerous, opaque risk-based prices the banks push through the processors, which are bad news for new, small merchants who are inherently risky.


Threat to Visa and MasterCard 

When scaled fully, this Square deal could be the biggest threat Visa (V) and MasterCard (MC) have ever faced. A single deal, a single process and a clean sheet of paper cost much less to handle than the decades-old systems the big processors have built.


Then, big data. For Starbucks, this is all about the data.

 

Loyalty programs have been around for ages, but most companies don't know how to do them effectively. I have a Kroger (KR) Plus card, and it gives me discounts whenever I shop, in exchange for the transaction data. But I've never gotten an offer from the company, and never changed my shopping patterns in response to the card or the discount. Kroger might be adjusting inventory patterns from the data, but it can get that knowledge from inventory -- it does not need to pay me for it.

 

Starbucks now has an opportunity to reward loyalty automatically, without resorting to cards. It could even handle gift cards through Square,  which would be great because the $25 iTunes card my kid got for Christmas was already compromised and didn't work. Doing this centrally, rather than at the edge, thus carries a real consumer benefit for gift-card givers. The "card" itself can just be blank, a token, and doesn't have to go into your George Costanza wallet.


A 'virtual currency' 

Finally, social marketing. This is the big one.


Right now, merchants using a system like Groupon (GRPN) or Scoutmob pay two fees -- one to the marketer and one to the customer. What if they didn't have to pay the discount?

 

Data give Starbucks the power to create a "virtual currency" around not just its own products, but around other products. It gives Starbucks a way to account for this currency. The problem with Facebook's (FB) virtual currency was that there was no real-world connection, no way to get a real payout.

 

What if there were? What if you could use your Star-Bucks to get real discounts from other merchants, starting with those tied to Square? What if a Square merchant could give you Star-Bucks as a sort of "green stamp" that would get you a discount on your next latte? What if merchants -- any kind of merchant -- built games with these Star-Bucks as prizes, games tied to loyalty or product knowledge?

 

Starbucks can use Star-Bucks to build traffic to its new wine-and-beer offerings, which promises to extend the time a store is open and busy by many hours. They can use Star-Bucks to surprise regular customers with free muffins, and know that offer is paid for. And they can build a network of merchants within each community, tied to Square, who can take this to "the next level."


The digital glue 

Why hasn't Wal-Mart (WMT) or some other big merchant done this? Probably because they didn't buy into a processor. They just do deals with processors, like American Express (AXP), and thus lack control over what happens next.

 

The "next big thing" has always been connecting the digital world to the real world, in a meaningful way that delivers benefits to merchants, consumers and whoever was squirting the digital glue. Starbucks now has digital glue.


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2Comments
Jan 23, 2013 3:45PM
avatar
Unfortunately the writer hasn't done much homework or didn't consult with anyone in the processing industry before writing this piece. Square doesn't have it's own network apart from Visa, Master Card, Discover or American Express. All of their transactions go through Visa, MC, Amex or Discover networks so there is no threat to them. In fact, they will benefit. Square is subject to the same interchange cost that all independent sales organizations and acquirers have so nothing special special is going on there. In fact, I can guaranty you that Starbucks won't be paying 2.75% on their transactions. I think they will want to stick with what they already have and paying only interchange and assessments with a small mark up. I would bet their effective rate is in the neighborhood of 1.80%. . However, Square has brought a different paradigm to the industry that many are still trying to get their minds wrapped around. 
Jan 19, 2013 10:55AM
avatar
living in argentina, merchants used credit card paper for currency.  no trans fees after the first one... cheap and safe.  what a concept.
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