Square, Starbucks roll out service

Jon Swartz, USA TODAY | USATODAY

SAN FRANCISCO -- Square's grand business plan just got a caffeinated jolt.

In one of the largest mobile-payments rollouts yet, technology start-up Square on Thursday said it has begun processing all credit card transactions at Starbucks' more than 7,000 U.S. storefronts. Next month, customers will be able to purchase coffee with Square's Wallet app, the companies say.

Starbucks also said it will enable digital tipping on its mobile-payment apps and on Square Wallet in the U.S. in summer 2013.

"We think we can redefine a Starbucks customers' experience," Square CEO Jack Dorsey told USA TODAY.

Dorsey, who invented Twitter, and Starbucks CEO Howard Schultz presented the plan at Starbucks' Leadership Conference in Houston, where more than 10,000 Starbucks store managers were in attendance.

With Starbucks, Square -- whose app is increasingly popular among small businesses -- for the first time is wading into mobile payments for large multinational organizations. It plans to venture overseas next year through Starbucks, which has 18,000 stores in 60 countries.

Eventually, Starbucks' customers will be able to order and pay for drinks via their smartphone before they enter a store, says Adam Brotman, chief digital officer at Starbucks. Starbucks employees, in turn, would be able to process orders before a customer speaks, based on the information contained on their Square apps, he says.

"There are seismic changes to (consumer) behavior because of technology," Schultz told store managers in Houston. Starbucks chose Square instead of about a dozen other tech suitors because "Jack cracked the code on customer experience," Schultz said.

For Starbucks, which already had a successful mobile-payments system, the partnership with Square expands its formidable reach. Starbucks is the largest retailer accepting mobile payments -- it handles more than 1 million mobile transactions a week. The deal with Square lets credit card users who don't have a Starbucks card make mobile payments at the coffee chain. (Frequent-buyer rewards that come with Starbucks cards are not transferable to the Square app.)

The Starbucks deal introduces Square to more consumers and helps the overall digital market, Denee Carrington, an analyst at Forrester Research, said in a recent report.

While Starbucks has no immediate plans to displace cash registers with card scanners, as Nordstrom and others do, its deal with Square does augur a continued shift away from cash.

Payments on a 'massive scale'

Square's success has spawned competing services -- PayPal Here, NCR, Intuit and Groupon, to mention a few -- that have crowded the market, and given consumers one less reason to use cash.

Handicapping the mobile-payments race, each major player has carved out a niche, according to analysts. Square is ideal for small merchants such as coffee shops and food trucks. PayPal Here is positioned for businesses that have an online and offline presence. Groupon's new service will appeal to businesses such as restaurants and spas with which it already works. Intuit's GoPayment is designed for small and midsize businesses.

Square is generally in "good shape," Aite Group analyst Rick Oglesby says, because it has a head start on the competition -- and the Starbucks deal is "huge" by putting them in front of a mainstream audience.

"No one else has really achieved that yet, so I'd say that Square is probably off to the best start -- but it's going to be a very long and competitive race with more than one winner," Oglesby says.

Despite the Starbucks deal, Square faces formidable competitors and major hurdles to becoming a force with big retailers and corporations. "While Square is new, it's just facilitating a 50-year-old payment mechanism — mag-stripe cards," says Nick Holland, an analyst at market researcher Yankee Group.

Mobile-payment transactions will surpass $171.5 billion, up 62% from $105.9 billion in 2011, says market researcher Gartner. The ranks of mobile payment users worldwide, meanwhile, is expected to vault 32%, to 212.2 million in 2012, from 160.5 million in 2011.

Rocky Agrawal, an analyst at reDesign Mobile, offers a cautionary note about the massive scale of payments, and how Square sizes up. While Square claims to process $8 billion in transactions annually, he says, American Express processed $822 billion.

Squaring up

Since its device and app launched in 2010 as a pioneer in mobile point-of-sale systems, Square has gained more than 2 million customers, who typically pick up the small, white plastic device for free through the company's website, or with a rebate from retail stores such as Apple, Best Buy and Walmart.

Smaller businesses, such as coffee shops and food trucks, use Square's device, which plugs into the headphone jacks of mobile phones and tablets to perform transactions and keep customer records.

The 400-person private company has grown quickly by raising capital from the likes of Visa and venture-capital firms Kleiner Perkins Caufield & Byers and Sequoia Capital. Former U.S. Treasury secretary Lawrence Summers and Schultz are among its board members.

Last month, Square said it raised $200 million in its latest round of funding from investors that include Starbucks, Citi Ventures and Rizvi Traverse Management. That now values Square at $3.3 billion.

Square's device plugs into Apple and Android mobile devices to enable smaller merchants who previously were only able to take payments made by cash or check, to accept credit cards by swiping them through the dongle.

Square has widened its ambitions. It offers a merchant-finder for people to identify which businesses take Square payments; merchants can use it as a way to manage inventory; and there are now options to pay with Square that do not involve you actually pulling out your card.

The Starbucks deal not only broadens Square's audience and visibility, but it "validates" the company's mission, Dorsey said in the interview. As a testament to Starbucks' influence among retailers and as an early technology adopter, Square has heard from several major retailers that now want to work with Square. He hinted that more deals may be announced but gave no specifics.

The pitched battle for mobile payments intensified in August, when Square announced a new pricing model that gives merchants the option to pay a monthly fee of $275 instead of the current 2.75% fee on every transaction.

Merchants who make more than $10,000 per month in business would pay less under the new pricing plan. It's all part of a move to make it easier for consumers and merchants to eschew cash, Dorsey says.