A really square deal for Starbucks

Starbucks' recent business arrangement with Square is undoubtedly a huge boost for the privately held e-payments company. Despite Square's purported value of more than US$3 billion, the company has, up to this point, concentrated on smaller businesses. The deal with Starbucks includes the installation of its payment system at 7,000 Starbucks locations, an infusion of US$25 million into its coffers, and a new board member in Starbucks' CEO Howard Schultz. For Square, the situation sounds sweeter than a Starbucks Frappuccino.

Starbucks uses alternative payment to drive growth
The deal also promises to be lucrative for Starbucks. The coffee vendor has, for some time, used the marketing of payment as an integral part of their business model, with spectacular results. The company has successfully used its Starbucks Card, a prepaid, rewards-style debit card, to increase growth. Domestic sales pegged to the use of the card were a mere 13% in 2006, compared to 27% for last year. Obviously, the promise of a free cup of coffee is a strong incentive for Starbucks customers.

Starbucks later added an app for smartphones using Google's Android platform, and Apple's iOS-based iPhone, as well. The app allows customers to access and refresh their Starbucks Card account via their smartphone, in addition to using their phone for payment. In its debut year, users loaded over US$100 million onto their cards using the app. The coffee retailer says it handles over 1 million mobile transactions each week just through its smartphone apps.

Fool's take
For such a young company, Square has never had problems attracting investment interest from the big boys. Last year, Visa made an unquantified investment in the company, in addition to depositing one of its executives onto Square's advisory board. The start-up is becoming a serious rival to eBay's PayPal, as well. Paypal predicts it will process approximately US$10 billion in transactions this year, some using a card-reading dongle similar to Square's that attaches to a user's phone or tablet. Square estimates it handles about US$6 billion in payments per year.

Starbucks will be a winner here, too. The business savvy here is unrivalled, and the company has boosted sales efficiently and consistently by offering customers choices in payment styles. An interesting note here is that it is rumoured that Starbucks rejected other e-payment systems, and actively shopped the deal to Square. Starbucks obviously sees something in Square that it likes — and believes that offering customers its payment system will send sales soaring. And that sounds pretty sweet for investors, too.

Square and Starbucks will undoubtedly make a big splash in the mobile payments arena – only time will tell if mobile payments present a risk or opportunity for our banks – Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank (ASX: CBA), National Australia Bank (ASX: NAB) and Westpac (ASX:WBC).

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