August 8, 2012, 11:25 AM

Starbucks invests $25 million in mobile payments player Square

Now Starbucks customers have two mobile ways to pay.

Lead Photo

Starbucks Coffee Co. and mobile payments company Square are partnering to change the way people pay at the popular coffee shop and help Square expand operations in the burgeoning mobile payments field.

Starbucks will invest $25 million in Square as part of the company’s Series D financing round. Square declined to reveal the total amount raised in this financing round. Square will process the credit and debit card transactions at Starbucks’ 7,000 U.S. shops, which will significantly expand Square’s operations while reducing Starbucks payment processing costs, Starbucks says. Starbucks chairman, president and CEO Howard Schultz will join Square’s board of directors.

Customers will be able to use Pay with Square, Square’s payments app for consumers, at participating U.S. Starbucks stores later this fall. To pay, a customer opens the app on her smartphone, opens up a new payment tab, then tells the cashier her name. Her picture appears on the payment terminal screen and the cashier rings her up. The merchant’s payment system syncs with Square and displays the charge on the payment tab within the app.

Starbucks will integrate Square’s system with its own so customers with Square accounts can pay via a transaction synchronized between the Starbucks checkout system and the app. Customers can find nearby Starbucks locations within the Square Directory. Using Square Directory, Starbucks customers also will be able to discover local Square-affiliated businesses.

Square will complement, not replace, Starbucks’ existing mobile payments technology, which enables customers to link a Starbucks app on their smartphone to a Starbucks debit card and pay for their morning cup with a scan by their phones.

“As the largest retail mobile payment platform in the U.S., we’re excited and proud to accept payments with Square,” Schultz says. “The evolving social and digital media platforms and highly innovative and relevant payment capabilities are causing seismic changes in consumer behavior and creating equally disruptive opportunities for business. Both Starbucks and Square take a similar approach when building products and running our businesses, and together we can bring the best possible payment experience to Starbucks customers.”

In addition to enabling consumers to buy through its payment app, Square lets merchants process credit card transactions. It hands out free credit card readers, dongles that plug into the audio jack of smartphones and tablets. They are used, instead of a conventional point of sale terminal, in conjunction with a Square Register checkout app. Square says more than two million individuals and small businesses use its services.

Square does not require merchants to sign a contract for its mobile commerce services but charges 2.75% per swiped transaction. If it hits its previously stated projection of $6 billion in transactions in 2012, it would generate $165 million in revenue this year.

The Starbucks/Square partnership represents a significant milestone in the advancement of mobile payments and digital wallets, writes Forrester Research Inc. analyst Denee Carrington in a new blog post.

"Customer recognition, embedded loyalty and faster checkout is what Square enables for its existing merchants,” Carrington writes. “If the Square/Starbucks duo can successfully deliver a more convenient, contextually relevant and compelling experience, then consumers will look forward to using the Pay With Square digital wallet at Starbucks and with their other favorite merchants. It also will set a new a standard for the type of compelling experience consumers will know is possible and come to expect when using a mobile digital wallet.”

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