Starbucks is investing $25 million in mobile payment venture Square, and will allow customers to use a Pay with Square smartphone application to buy coffee at its retail stores starting this fall, the companies announced Wednesday.
As part of the deal, Square will process credit and debit card transactions at Starbucks stores, a move that will reduce credit card processing costs for Starbucks while expanding Square's scale, the companies said in a statement.
Square said that more than 2 million small business customers currently pay it a standard 2.75% processing when customers swipe credit and debit cards through a stamp-sized card reader that can be plugged into a smartphone to send transaction data wirelessly.
The Square process is an alternative to mobile payment systems like Google Wallet and the coming ISIS network, which will focus on smartphones equipped with NearField Communications chips to transmit data to an NFC terminal in a store to process a transaction.
Apple is also reported to be developing a mobile payment app for the coming iPhone 5. The new Apple smartphone will rely on Bluetooth 4.0 technology to transfer payments.
Starbucks already offers optical barcode scanning of smartphones on the iOS and Android platforms at 7,000 store for customers using a Starbucks card. The coffee maker has raised concerns in the past that NFC technology won't be implemented fast enough to serve its mushrooming mobile payment needs.
Square is able to charge small businesses lower transaction costs than conventional payment systems because of agreements it has with banks and credit card companies, analysts said.
Because the Square technology provides banks with access to more small businesses, they can offer the lower transaction rates. Traditionally, banks charge businesses between 1.5% to 12% of each transaction, depending on the size of the business.
The transactions costs are known as interchange fees.
Starbucks customers won't have to swipe a credit card through a small Square card reader connected to a smartphone or other device to buy coffee. Instead, they will need to download a Pay with Square application to an iPhone or Android device. When the application is opened, the customer touches a tab and a two-dimensional barcode will appear that can be scanned at the Starbucks counter, a Starbucks spokesman explained.
Starbucks struck a decidedly progressive tone in its statement about its partnership with Square.
CEO Howard Schultz, who will join the Square board of directors noted: "Because Square's revolutionary technology allows anyone to accept credit and debit cards, it gives entrepreneurs an essential tool to jump-start their business while providing existing small companies access to new customers. This development can play a vital role in spurring small business growth and hiring."
The partnership also means that customers will eventually be able to use the Square Directory from their mobile devices to find other nearby small businesses using the technology.
Starbucks didn't disclose how much it expects the new technology can cut its credit and debit card transaction costs.
Cutting interchange fees paid to banks is a key issue for many large and small retailers, some who have taken banks to court over the fees, Gartner analyst Avivah Litan said recently.
The Home Depot recently deployed PayPal payment system on terminals at nearly 2,000 U.S. stores. The system allows Home Depot customers to enter a mobile phone number and PIN to make a payment, instead of using a credit card.
A Home Depot spokesman said in July that the PayPal technology was installed in part to lower what he called "abusive" interchange fees.
Jeff Kagan, an independent analyst, said that the $25 million investment by Starbucks in Square shows that "mobile payments will be very important going forward [and] Starbucks will play a role in that world."
For customers, he added, "it's exciting to be on the cutting edge using this new technology."
In a blog post, Litan said the Starbucks and Square partnership will be significant.
"We finally have a killer app for a mobile wallet and we finally have strong mobile payment competitors taking on the legacy credit card payment networks," Litan wrote. "Just what free market competition is supposed to encourage."