By Willy Staley  Wed Aug 8, 2012

Starbucks and Square Announce Partnership: But Will Mobile Wallets Work Outside Coffee Shops?

Nicola/flickr source

Starbucks announced a game-changing partnership with Square on Wednesday. In addition to receiving $25 million in Series D funding from Starbucks CEO Howard Schulz, who will take a seat on Square’s board, Square will also be the sole processor of all of Starbucks’ credit and debit transactions. This is huge for Square; Starbucks will make Square’s mobile payment technology, Pay with Square, an option in some 7,000 U.S. locations. For Starbucks, it will make itself a leader in the mobile payments space once more. The question remains: do mobile payments work well outside of coffee shops?

Square will be available in select Starbucks locations starting this fall. This is likely the biggest merchant partnership announced so far for a mobile wallet platform — but it’s at a coffee shop, which is funny (to us, anyway).

We have noted before that swipe dongle makers like Square and PayPal have a tendency, in their marketing materials, to consistently show their goods in action in coffee shops. It would seem that coffee shops with pretty baristas and white walls are all that exist in our mobile money future. It makes sense, given the personal nature of what Pay with Square promises to be.

Pay with Square, once enabled at Starbucks, will work like this. Once you enter a Starbucks, your name and photo pop up on the register’s screen, thanks to Square’s GPS. When you order your drink, you give the barista your name — you already do this at Starbucks, with mixed results, spelling-wise — and they simply charge it to your credit or debit card by using Square’s technology.

“[Pay with Square] has a much lower threshold to customer adoption” than other competing mobile payment options, said Cherian Abraham, Mobile Payments & Banking Advisor at Experian Global Consulting. “You already give your name to your barista…this is definitely a natural partnership between Square and Starbucks.”

The deal, according to Abraham, probably benefits Square more than Starbucks, for now. But there’s a lot of long term upside for Starbucks in the deal, too. “Their $25 million could be worth a lot more,” if Square is acquired at a higher valuation, or goes public. Also, Pay with Square opens up a new marketing channel for Starbucks, said Abraham, after a customer has left the premises but before they close their tab.

“Imagine if Starbucks wanted to push forth with selling digital goods,” said Abraham, adding that they already do sell music. Pay with Square would also add a way for customers to tip their baristas, which might be good news for Starbucks employees who haven’t had the best of luck with earning tip money.

This increased ticket size will benefit its new payments processor, too. Square does better on bigger ticket sizes, so pushing for Pay with Square is essential to making the business profitable.

But will Pay with Square be able to attract merchants who sell big ticket items more regularly? Home Depot or Ikea? Even a supermarket? The pay-by-name transaction is far less natural a fit at these retailers, where interactions between customer and staff are more mechanical than they are at Starbucks. Concerns aside, other mobile payments companies would be wise to take note.

“This is probably not a good thing for NFC,” said Abraham.

 

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