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Why Did Starbucks Choose Square?

Because Square handles payments like Starbucks handles coffee.

Why Did Starbucks Choose Square?

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: "," 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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