Why Did Starbucks Choose Square?

Because Square handles payments like Starbucks handles coffee.

When selecting a partner to power mobile payments in its stores, Starbucks could have approached Google, one of the most profitable companies in the world. It could have worked with PayPal, which already has more than 106 million users in the payments space. Or Isis, a consortium formed by telecom giants Verizon, AT&T and T-Mobile that is also producing a "mobile wallet."

"I’m sure if you and I were to rattle off the names of everyone in the space, that at some level we’ve been in discussions with them," Starbucks’ Chief Digital Officer Adam Brotman tells Fast Company. Presumably that includes MasterCard, Visa, and VeriFone, which handles $10 billion in global transactions per year. But Starbucks chose to partner with Square, a three-year-old startup. Why?

"They’re focused with a level of intensity on the customer experience," Starbucks CEO Howard Shultz told a small group of reporters Wednesday morning.

In other words, Square treats payments a lot like Starbucks treats coffee: by focusing on the experience around a product that is more or less a commodity.

While Square’s biggest competitors showcase different payment cards in "wallets," the Pay with Square app focuses on making the mechanics of payments disappear all together. Instead of virtual cards, it stores a list of users’ favorite businesses and displays other Square-accepting businesses nearby—all with an OCD-commitment to elegant design.

Disclaimer: Video is a b-roll with no audio

"The focus is on the experience, and putting that above everything else," says Square founder Jack Dorsey 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: is that we can fade the technology away, we can fade the mechanics away so that the people can focus on a very human, natural, personal interaction and a very simple exchange."

Starting this winter, Starbucks will accept payments from the Square app in addition to its own mobile app, which its customers already use to pay about 2% of the time. Square will also process all of Starbucks' U.S. credit and debit card payments, no matter how they're made—gaining a huge addition to the transactions it processes in addition to valuable visibility that comes with its app being accepted at 7,000 U.S. stores.

Other businesses that accept Pay with Square don’t scan users’ phones, but rather open "tabs" for them. GPS technology confirms that a customer’s phone is in the store, and a photo ensures that the person buying an item actually owns it. All customers do is say their name.

Brotman calls Square’s payment system "magical"—even though, at first, Starbucks' baristas will scan a barcode on Square's app when a customer checks out instead of just taking names.

It’s this magic, ease of use, and incessant focus on experience that Square’s competitors—most of whom have some combination of deeper pockets, more users, and a longer history of processing payments—seem to not appreciate.

"We're a quiet company. We want to enable those magical moments between you and the places you choose to shop—not between you and NCR," Christian Nahas, vp of specialty retail for the 128-year-old company that did $5.4 billion in revenue in 2011 told Fast Company in March. He added, "If you run a transaction on Square with an AmEx, it says 'Square.' Every Square merchant you go into, it just says, 'Square,' 'Square,' 'Square,' 'Square,' 'Square.' It's just a difference in philosophy."

When asked recently about rumors that Square might be raising a gigantic new round of funding at a multi-billion-dollar valuation, Verifone CEO Doug Bergeron put things more succinctly: "Pets.com," he said, a reference to the quintessential over-valued startup of the dotcom bubble. Asked for comment on today's news, a representative for the company said it does not comment on competitive news.

PayPal spokesperson Anuj Nayar recently summed up Square like this: "The consumer needs to see the benefit beyond, ‘This is just cool.'" Square's 2.75% transaction rate is actually slightly higher than that of PayPal Here, which charges 2.7% (Schultz didn't comment on whether Starbucks would enjoy a favorable rate).

Ironically, appealing to the customer and the merchant in a capacity beyond providing a transaction—being "cool" enough to inspire random people to tweet about the joy of credit card spending via Square—is a key ingredient in winning Square the deal with Starbucks.

Only about two million people have downloaded Square’s app, and only about 75,000 merchants accept it. That’s not much when you consider that Starbucks alone has about 18,000 stores worldwide. But if Square's competitors haven’t taken Square seriously in the past, they’ll likely start soon.

In addition to accepting square payments in 7,000 U.S. Starbucks stores, chipping in $25 million of funding and entrusting all of the company’s U.S. credit and debit transactions to Square’s processing, Schultz says he hopes to turn Starbucks into a "promotional vehicle for Square."

"This is not a bolt-on strategy," he said of the startup. "This is the only thing they do."

Austin Carr contributed to this report.

[Image: Sinoptik via Shutterstock]

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7 Comments

  • Gary A. Kline

    "The consumer needs to see the benefit beyond, 'This is just cool.'" - PayPal spokesperson Anuj Nayar.

    So, in PayPal's view, the consumer is just looking at the wrong features?  Unfortunately for PayPal and businesses in general, businesses don't get to make that choice. 

    The consumer chooses their wants and needs, and its up to a business to meet those wants and needs. Or someone else will.

  • Tobias Wacker

    As a merchant who has used both PayPal and Square, I can only second other comments here. First of all, PayPal's 2.7% is a joke. It's 2.7% on top of all kinds of other fees and only if a customer uses a basic card. When someone pays with any sort of rewards card (which is about 70% for us), fees go up fast. And don't even get me started on how many times our account got locked for "security reasons" that always take weeks to resolve. By contrast, Square just works. It's 2.75% and the money is in our account the next day.  

    I completely agree with the philosophical discourse of putting the customer first. But choosing Square over PayPal also means choosing honesty and openness over shadiness and convolution. 

  • Arman Nobari

    I'm an artist and designer who caters to both small and enormous businesses. When I've got to wear a suit and tie, a check is given to me or it's just wired straight to me. When I'm dealing with smaller-sized clients though, the Square reader lets me accept their credit cards right there, in person. Makes life so much simpler and convenient.

  • Lisa Harrigan

    My small businesses are using Square more and more. It is convenient, they are responsive if there are problems. Service what a concept.
    Paypal messes something up and it takes us a month to straighten it out, most of that time sending e-mails back and forth.
    And if you want to take credit cards on site with a swipe device, Paypal is way more expensive, they have minimums and monthly fees. Square has neither. If you don't use it, there is no charge.
    And as a Customer to other Square Users, I give them my card, they swipe, I sign, and then my receipt is automatically mailed to me. It's simple and elegant.
    Several merchants I go to have just signed up for the Pay with Square feature. And I've downloaded it to my phone. I look forward to using it in the future.

  • Gene Signorini

    This news, along with last week’s Google Wallet announcement, points to the
    fact that users are ready for mCommerce experiences that are easy-to-use and
    non-restrictive ---both of which lead to a pleasant user experience. At
    Mobiquity, we’re really excited about the future of mobile payments and look
    forward to helping our clients further penetrate the market. – Gene Signorini,
    vice president of mobile insights at Mobiquity

  • Frost

    As a small business owner I've used Paypal a number of years, really just as a convenience for some of my clients. I've found it cumbersome and I've always detested their habit of hanging on to my money for "three to four" business days. Such bullshit. We live in a digital age. There is no excuse to hang onto my money, when I've already paid a percentage for the service, in the 21st century.

    Square came along and you better believe I dropped Paypal like the loathsome service it is.