Why Square Doesn’t Equal Square – and Why Starbucks is Cooperating with Square

• Partnership between Square and Starbucks

• Starbucks integrates “Pay with Square“ as well as payment processing via Square in its 7,000 US locations

• Within the framework of a larger financing round (about $200 mil.) for Square, Starbucks is investing $25 mil. and has become a member of Square’s board

• Cost advantages due to new flexible technology

• Cardless payment is increasingly becoming reality; Square is securing decisive market shares for itself

The partnership between Square and Starbucks is causing a big stir. In order to understand the full impact of the deal, it is necessary to pinpoint which one of Square’s services is part of this cooperation. This contribution will focus on clarifying and assessing this specific partnership.

In 2009, Square, created by Twitter co-founder Jack Dorsey, launched the “Square Card Reader”, a device for iOS- and Android-based smartphones and tablets. This dongle is a card reading device for credit cards with a magnetic strip and allows retailers to process payments on their phones or tablets, thereby making the point of sale mobile. Square has expanded its original product through an app that offers comprehensive data warehousing, including evaluative functions, called “Square Register”.

The third and until now final product by Square is yet another app, “Pay with Square”, with which Square is directly addressing customers for the first time. This app allows customers to pay at stationary locations – without further steps in the payment process and without having to pull out their smartphones.

Against the backdrop of the evolution of Square products – and thereby also of Square itself – (image on the right, Source: Square), it is possible to clarify the elements of the cooperation between Starbucks and Square. The deal has nothing to do with the introduction of external card reading devices in Starbucks stores or the Square cashier system, i.e. neither with “Square Card Reader” nor “Square Register”. Rather, the deal revolves around two other issues.

First, Starbucks will also participate in “Pay with Square”, thereby enabling its customers to find Starbucks stores using the app, and to pay there via the app. This is possible through the unique feature that the Square app creates a QR code on a customer’s smartphone with which the customer pays at the till. Second, Starbucks will process all of its debit and credit card transactions in the US market via Square.

Together, these two elements make this an exciting cooperation, because they demonstrate which advantages this cooperation bears for Starbucks, for Square, and for customers.

• Gaining access to new customer groups via Square is less important for Starbucks. The advantage of this partnership for it lies in significantly reducing its processing costs. Square can apparently contribute to lowering these costs, because its systems (in collaboration with JPMorgan Chase) are very agile.

• For Square, on the other hand, it is important to reach a critical mass of users with its services in order to secure market shares for itself and to use more of its system capacity. Worth noting here is how flexible Square is showing itself to be by easily customizing its app to Starbucks’ needs (QR code). The high level of flexibility in Square’s technology will be decisive in this regard.

• Customers can look forward to spending less time waiting to pay and more time enjoying their coffee – that’s what the companies are hoping, at least. In any case, paying via smartphone Is increasingly becoming the reality for customers. That means that they can make purchases while using their smartphones without having to switch to other media such as cash or cards.

The cooperation between Starbucks and Square shows how far the market for financial services has come in terms of innovative payment solutions. After Home Depot introduced “PayPal Here” in its stores with resounding success some time ago, Starbucks is now changing its entire payment processing system with the help of Square.

Cardless payment transactions are thereby increasingly becoming a reality. This is also noteworthy due to the fact that in the traditional card-based business, resources are being used in a very different way. Here, the players in the US market are starting to discuss replacing the magnetic strip with EMV chips for cards. The latest step in this process was an announcement by the Smart Card Alliance about the creation of an EMV Migration Forum.

Meanwhile, Square is working to secure important market shares in the field of new, cardless payment transactions. When taking into consideration that payments via smartphone are fading into the background ever more quickly for customers, it becomes clear how important it is for a company to be a first mover in this field. Through its partnership with Starbucks, Square is positioning itself as one of the first players in the newly created value-added chain of cardless payment transactions.

Partnership between Starbucks and Square
https://squareup.com/news/releases/2012/square-starbucks
https://squareup.com/letters/onward
http://techcrunch.com/tag/square/

Analysis of cost efficiency
http://www.nytimes.com/2012/08/10/technology/the-campaign-to-digitize-your-wallet-is-intensifying.html?_r=3
http://online.wsj.com/article/SB10000872396390444423704577575803898185594.html

EMV Migration Forum
http://www.smartcardalliance.org/articles/2012/07/31/cross-industry-emv-coalition-created-to-support-move-to-chip-based-payments-in-the-u-s