Winner Of Starbucks-Square Deal? The Mobile-Payments Market

Going deeper into Wednesday’s Starbucks-Square mobile-payment announcement, it’s obvious who the big winner is. And it’s not necessarily Starbucks or even Square.

The coffee giant has partnered with fledgling mobile-payments vendor Square to bring smartphone purchases to its 11,000 U.S. stores. It’s a deal that adds weight to the argument that mobile payment –- using a phone in a store instead of credit or debit card –- is inevitable, so everyone should get on board now.

Square has built a respectable business since 2009 convincing mostly mom-and-pop operations to accept credit cards using its low-cost reader that attaches to a smartphone.

Starbucks did much more than agree to be a Square customer. It invested $25 million in the company, valuing the startup at $3.25 billion. To make sure Starbucks' interest is served, its CEO, Howard Schultz, will join Square’s board.

Starting in the fall, people who install Square’s mobile app on their smartphone will be able to make purchases by opening the app and showing a bar code that a barista scans to charge the customer's credit account. The convenience and simplicity is why the coffee company believes people will bypass their credit cards and say, “charge it!” with their mobiles.

“The consumer is going through a seismic change in which cash, over time, will be obsolete,” Schultz said in an interview on CBS This Morning.

Schultz’s optimism comes from Starbucks' own experience. The company already provides a mobile prepaid-card app that can only be used at Starbucks. Since introducing the app 18 months ago, Starbucks has recorded 60 million transactions, according to Schultz.

Because Square’s app uses the same hardware as Starbucks' app, major hardware change won’t be necessary, which means significant savings. In the future, Starbucks will make use of Square’s full GPS technology, making it possible for customers to buy their non-fat mochas by saying their name, according to The New York Times.

Large upfront investment has turned off large U.S. retailers. The changes required go beyond hardware. Transactions at the counter have to be recorded in backend financial systems, which means a lot of expensive software changes. Starbucks was Square’s first major deal with a national retailer.

“This is all about money, and in the current macroeconomic environment, it’s been hard to convince merchants to make that investment,” said Mark Hung, analyst for Gartner.

Stores could hold off because most customers have been content to use credit or debit cards. But attitudes are changing. In a survey of 7,600 U.S. adults with mobile phones, Forrester Research found 30 percent interested in using mobile payments. Younger consumers were even more willing to use mobile wallets.

Seeing change afoot, Starbucks decided to join other companies on the bleeding edge.

In February, Home Depot rolled out PayPal’s mobile-payments system in the home-improvement retailer’s 2,000 U.S. stores. PayPal customers pay by entering their mobile-phone number and a PIN on an in-store terminal.

Hoping to nudge other major retailers into the arena are Google and Microsoft. Google has already launched its mobile wallet and Microsoft plans to support mobile payments in Windows Phone 8.

Apple is more cautious, according to The Wall Street Journal. The company lurked before revolutionizing the smartphone and tablet markets.

“If Apple threw itself into the market and brought along big retailers with it, then NFC has a chance to suddenly reach critical mass all at once, and the mobile payments market could be in for a big disruption,” the Business Insider said in a recent report. NFC, or near-field communications, is a wireless technology that would make it possible to touch a smartphone to a reader in order to make a purchase.

Despite recent market activity, mobile payments are not expected to become mainstream for another three to five years, according to Forrester.

But Starbucks' partnering with Square is a necessary step in the market’s evolution.

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