1109RA Square and Starbucks Brew a Mobile Payments Deal to Jolt Consumer Adoption
What is Happening? Square and Starbucks announced on August 8, 2012 that they were entering into a partnership in mobile payments. Square, a three-year-old startup, will be processing payments for all 7,000+ Starbucks stores in the U.S. Square will also enable a "Pay with Square" app, which utilizes location services to automatically detect when a customer enters a store. The customer will then be able to complete a purchase without even taking their phone from their pocket. Square charges 2.75 percent per transaction, slightly higher than Paypal at 2.7 percent, but many expect that Starbucks is getting a preferred deal.
Starbucks selected Square over more-established rivals for the partnership, including PayPal, which has more than 106 million users in the payments (but not mobile payments) space and , a consortium of telco Master Brands Verizon, AT&T, and T-Mobile that is also producing a “mobile wallet.” Isis has announced partnerships with Coca-Cola, Aeropostale, Dillard's and Macy's. PayPal counts among its adopters HomeDepot and Office Depot stores. VeriFone Systems, the world leader in mobile payments, lost eight percent of its market cap immediately following the announcement, and another of Square’s competitors, USA Technologies, lost four percent.
Why is it Happening? The device-as-a-sensor bundle has become an integral part of the payment process now, superseding previous eras where the browser-based payment systems were essentially device agnostic. These modern services are device-reliant as they require access to the sensors the device already has.
The mobile payments space is still in its transformative stage, but Starbucks has amassed over 1 million users of its own mobile payment application or about 2 percent of its customers. Clearly, the market for mobile payments is potentially huge, and the Starbucks partnership with Square confirms the trend toward truly pervasive availability and frequency of mobile-device-based retail payments and other transactions. As more vendors adopt this model, they will be able to benefit from the rapidly-growing available network of users of smartphones and other mobile devices.
The technology solution is of less importance that the cultural fit. Square gets Starbucks and Starbucks gets Square. It’s “cool” that matters more than GPS or Bluetooth or NFC.
According to Square founder Jack Dorsey, “The focus is on the experience, and putting that above everything else,” in speaking about Starbucks's stores. “It’s not just the product that you end up drinking, but it’s how it’s served. It’s the experience walking into the store, walking out of the store and everything around the store.
“And that’s something we’ve always believed strongly in building our technology, building our product. It’s that we can fade the technology away. We can fade the mechanics of it away so that the people can focus on a very human, natural, personal interaction and a very simple [business] exchange.”
Putting in place a strategy for the enterprise to adopt mobile payments is now critical. The deal between Starbucks and Square signals a market ready for growth, potentially explosive growth, and capable of scaling rapidly.
Square’s method of mobile payment, based on previous history and location services, does not rely on NFC (near field communication) or Bluetooth technology - essentially leapfrogging competitors PayPal and Isis, which have mobile payments capability based on NFC. As a mobile technology solution, NFC has failed to materialize over the last several years, though it has been consistently promised as a robust and highly-secure solution. The problem is that NFC has not made it into many phones yet, and the PayPal and Isis methods are only compatible with 5 Android devices at present. As a result, Square has developed a technology based on GPS and the currently available hardware/API ecosystem in existing smartphones that obviates the need for dedicated communication channels.
Already there are many synergies with existing technologies in the new master architecture combining Cloud, Mobile, Social/Collaborative and Data Analytics platforms with Integration to on-premises Data Assets. Mobile payments will deliver among the greatest near-term benefits as part of the Boundary-free Enterprise (1052CLS, “Boundary-free Enterprise™: Empowered by the New Master Architecture,” 11Apr2012), and will generate its own unique business cases as enterprises explore how to take advantage of these new capabilities.
Beyond payment capability, Square provides other tools to small businesses, but its analytics and data visualization will likely generate the most significant market disruption. Largely because of cost and relative complexity of use, only six percent of small businesses track sales to the degree that Square now makes possible, and perhaps two percent of small retail merchants maintain programs of loyalty incentives for their customers. It is worth noting that the number of new Cloud solutions incorporating analytics and data visualization is accelerating. Following Square’s initiative, more advanced smaller vendors, enabled by their agility and more advanced technology capabilities, will force their larger rivals to act to stay competitive. PayPal is one.
Despite recent Internet kerfuffles regarding the very real security issues that still exist, mobile payments is essentially about convenience. In a battle between security and convenience, many if not most consumers will always opt for convenience. That, and “cool.”