The partnership between Starbucks and Square may accomplish what even tech giant Google hasn't been able to pull off: taking mobile payments into the mainstream.
With Starbucks, Square has a large and visible pulpit from which to tout its fledgling "pay with Square" mobile payment service. Best known for its small mag-stripe reader and ability to quickly handle transactions for small businesses, the company is pushing to get consumers to use Square as a digital wallet.
"The ubiquitous nature of Starbucks' national footprint can do a lot to raise awareness," Starbucks CEO Howard Schultz said during a meeting with reporters. "The hope is it will be a promotional vehicle for Square."
Dorsey, also speaking to reporters, called the deal "epic" and said it would attract more businesses to its pay with Square service.
The area of mobile payments is a hotbed of activity, drawing in disparate players such as Google, PayPal, Visa, and the wireless carriers. The companies see the opportunities that come from adding services on top of mobile payments, as well as the prospect of developing a stronger relationship with customers through their smartphones.
Visa and Google have paired their digital wallets with smartphones able to make payments at special registers using a technology called Near-Field Communication. The wireless carriers have a joint venture to roll out a national mobile-payment service using the same technology. Square, however, is going about it differently, and CEO Jack Dorsey said that its pay with Square service shouldn't be considered a wallet, but a way to remove the complications and technology from financial transactions.
Square's take on mobile payments
Pay with Square is a little known but handy service offered to iPhone and Android users that further eliminates the hassle of paying for goods and services. Consumers link a credit card to the account once and open a tab at a store or restaurant. Once there, consumers don't have to pull out a wallet at all; the store can sense the phone's location and automatically transfer payment. The cashier can verify the identity of the buyer through a picture ID and name that pops up on their screen.
"The mechanics of payment should disappear," Dorsey said. "How money moves shouldn't be in the purview of customers."
The service was previously known as Card Case before Square changed the name in March.
Dorsey and Schultz said that the two companies would work to promote the service within Starbucks stores. The app comes with a directory of participating businesses, and Starbucks will be among them, boosting the ranks of the 75,000 merchants already working with Square. Square will begin processing payments for Starbucks right before the holidays.
"We want to create a platform and showcase Square for the holiday season," Schultz said.
Starbucks has drawn interest from several technology companies because of the breadth of its presence, as well as its own savvy implementation of mobile payments through its own smartphone app. The company already processes 1 million mobile transactions a week and a total of 60 million since it began its program. Schultz said he talked to all the major technology companies before approaching Square.
Though Starbucks may give Square a leg up, pay with Square still has a long way to go before attracting a wide audience. The 75,000 merchants in the program represent just a small minority of the roughly 1 million merchants working with Square. The persistent knock on the service has been the lack of places to use it.
Curiously, the full capabilities of pay with Square -- namely, the location feature that detects the phone's presence within a store -- will not yet be available at Starbucks. The initial terms of the partnership call for Square to process the payments through the coffee chain's existing cash registers, which have already been upgraded to read smartphones under the chain's current rewards and loyalty program. Customers can still use pay with Square, but a Starbucks employee will need to scan the smartphone.
Also, the existing rewards program will remain separate from pay with Square, providing little incentive for enrolled customers to make the switch.
As part of the deal, Starbucks is making a $25 million investment in Square. Dorsey said he would use the funds to expand internationally. But for now, the partnership with Starbucks would focus on Square working with U.S. stores. Schultz said it was up to Square to decide when it would begin working with Starbucks stores overseas.
Dorsey said the announcement represents just a start for the two companies. He said Square would like to add location-based transactions to Starbucks stores but that it would require additional investment in new equipment. For now, he said he preferred to work with the coffee chain's existing infrastructure. As such, the stores won't be using Square's signature card-stripe readers.
Still, the deal represents a major win for Square and inches it closer to greater public awareness.