Starbucks Debuts ‘Square Lite’ in 7,000 Stores, But More Features Are Coming

Three months after announcing their partnership, mobile-payments provider Square Inc. and coffee king Starbucks Corp. said Starbucks customers could now use the Square Wallet for purchases at 7,000 company-operated U.S. locations.

The purchase process at Starbucks will be a bit different for users of the consumer-facing Square Wallet, formerly known as Pay With Square, from the experience they have at many of Square’s other merchants, but it will be a familiar one nonetheless if they’ve used Starbucks’s mobile-payments application. Customers first download Square Wallet to their iPhone from Apple Inc. or to a smart phone running Google Inc.’s Android operating system, and then set up an account linked to at least one credit or debit card. To pay at Starbucks, they simply open Square Wallet and tap “pay here.” The app generates a bar code, just as Starbucks’s closed-loop mobile app does, and the customer scans it at a reader on the checkout counter. The system instantly generates an electronic receipt and charges the purchase to the designated card in the wallet.

In contrast, Square Wallet users making purchases at merchants using the Square Register system have their names and pictures pop up on the merchant’s iPad tablet from Apple. To pay, all the customer needs to do is say her name; she doesn’t even need to show her smart phone. Thus, the bar codes at Starbucks don’t take full advantage of Square’s technological capabilities. But the system does have advantages in familiarity for customers and time to market, notes mobile-payments analyst Rick Oglesby of Boston-based Aite Group LLC.

“You don’t want to confuse your consumers, you want to offer them something that’s very, very similar,” he says. “This is a good way to get everything up and running pretty quickly.”

Users of Square Wallet at Starbucks will be able to view menu items, track their transaction history, obtain store hours, and find other local Square-accepting merchants. They won’t, however, be able to earn rewards in the My Starbucks Rewards program, which has about 5 million active members. To do that, they must buy using the Starbucks mobile app or the prepaid Starbucks Card.

In announcing their partnership Aug. 8, Starbucks said that it was investing $25 million into fast-growing Square and that Square would be its merchant processor. Square in effect is acting as an independent sales organization for JPMorgan Chase & Co.’s merchant-acquiring subsidiary, Chase Paymentech. The Starbucks pact represented a big win for Chase Paymentech over a key rival, Bank of America Merchant Services, Starbucks’s incumbent acquirer. A Starbucks spokesperson says the changeover to Square is under way but not complete.

The spokesperson declined to answer directly when asked if Starbucks transactions made through the Square Wallet would be aggregated to lower the retailer’s card-acceptance costs. Square’s standard pricing for its portfolio of mostly small merchants is 2.75% of the sale. Payments-industry observers believe that Starbucks as a large, national merchant is getting a lower, possibly much lower, rate, but Square will gain in other ways.

“I’m sure Square is not making big money on the payment-processing part of it,” says Oglesby. “Having consumers exposed to Square in Starbucks gives them the opportunity to add to their consumer base, and that makes them more appealing to merchants.”

The Square partnership, meanwhile, adds to Starbucks’s reputation as a tech-savvy merchant. Starbucks chairman and chief executive Howard Schultz told analysts Nov. 1 that Starbucks is now handling about 2 million mobile-payment transactions every week, and that 100 million transactions have gone through its mobile app since its January 2011 launch. Starbucks will add a tipping feature next summer to its mobile app and Square Wallet next year, and it also plans to add other services, including ordering.

Starbucks reported that $3 billion was loaded onto its prepaid card in fiscal 2012, and that transactions on the card account for more than 25% of its U.S. store tender.