Jack Dorsey: Today Starbucks Signed up for Square(squareup.com) |
Jack Dorsey: Today Starbucks Signed up for Square(squareup.com) |
It's beneficial for business owners who save money by using Square and use various incentives and analytics that come with.
Noteworthy points from the press release
The partnership terms include:
- Customers will be able to use Pay with Square, Square’s payer application,
from participating company operated U.S. Starbucks stores later this fall, and
find nearby Starbucks locations within Square Directory;
-Square will process Starbucks U.S. credit and debit card transactions, which
will significantly expand Square’s scale and accelerate the benefits to businesses
on the Square platform, especially small businesses, while reducing Starbucks
payment processing costs;
- Using Square Directory, Starbucks customers will be able to discover local
Square businesses -- from specialty retailers to crafts businesses -- from
within a variety of Starbucks digital platforms, including the Starbucks
Digital Network and eventually the Starbucks mobile payment application;
- Starbucks will invest $25 million in Square as part of the company’s Series D
financing round;
- Starbucks chairman, president and ceo Howard Schultz will join Square’s
Board of Directors.
Wikipedia says that Starbucks has $11.7 billion in revenue every year. I would assume that a majority of that revenue is through a card. I am not familiar with Square's revenue but I feel that this will at least double their transactions. Am I correct?
Really? I almost never use a card for café type purchases. Maybe if I were buying a meal, but for a coffee or two I'm 99% likely to use cash.
(Note: mine is an Australia-centric view, perhaps things really are very different in the USA?)
How does SB gets smaller fees through Square than negotiating directly with card providers?
How do card providers allow Square to sell their services cheaper than themselves?
And Square, you sure have a nice business, but the magnetic stripe is very insecure.
A lot of posters are forgetting that significant portion of Starbucks revenue isn't from beverages at the till. Starbucks sells a lot of coffee related goods and processes a lot of revenue for gift cards and their mobile payment app which they've had for quite a while (Apple recognized in iOS6 Cards).
I'm very curious if Square is going to handle all transactions that aren't at the physical point of sale. My gut feeling is that a big chunk of credit and debit revenue is for gift cards and gift card refills and that could impact your estimate.
Wait, what? Is this Starbucks buying a slice of the decision making process to ensure things are generally in their favor?
Starbucks can benefit from the Square deal, invest in them, and help promote them all at the same time. Actually pretty brilliant.
Square makes it ridiculously easy.
(disclosure: I am a WashU student and Cultivation Capital intern)
Maybe a more subtle way of informing the world about this partnership was better.
> Why is Starbucks (a well known brand) getting a personal post written by Jack, when Square's "goal" is to promote and help small businesses?
Square loses money on transactions below $6. The reason is for the sake of simplicity they waive the per-transaction fee that Visa/Mastercard charges them and just charge a flat percentage of 2.75%. But even though this is a relatively high percentage, it's not enough to recoup the cost of the per-transaction fee at low transaction sizes.
Take a $2 coffee charged to a Visa credit card. Visa charges Square 1.76% + 6 cents, or 9.5 cents. But at 2.75% Square only collects 5.5 cents.
So even if Starbucks was already paying wholesale Visa/Mastercard rates, they'll save 4 cents or more a cup thanks to Square's "simplicity subsidy".
Now multiply that by a few billion cups. Starbucks saves millions, and Square is happy to pay it to drive their growth into the stratosphere.
Source: http://feefighters.com/blog/can-square-make-money-with-its-n...
It will also put their product in front of end customers, many for the first time. I for one have heard/read about Square since they first started shipping readers, but had not actually seen the product in action till last weekend (live in Silicon Valley).
This is a major coup for Square. I've said it before, I'll say it again: I look forward to the IPO. Square has value.
And shouldn't 140 characters have been enough?
Also worth noting is that SB’s mentions processing costs will be cheaper. It’s hard for me to imagine that SB was overpaying with their last vendor so I worry about the economics on this deal. Maybe it’s the anchor tenant though that allows for additional enterprise deals to follow so is worth it. I can imagine other large retail organizations that had any interest were on the sidelines saying "It's one thing to service 10,000 food trucks but come on!" They'll stand up and listen now with this.
Starbucks has a history of taking risks with startups ~ https://en.wikipedia.org/wiki/Kozmo.com
# With Square:
"I am Jack and I would like [. . . ]"
(clicks name with face on screen to charge; receipt emailed automatically) "Ok, Jack, your total was [. . .] and here it is"
# Current Method:
"I would like [. . .]"
"Ok, your total comes to [. . .]"
[exchanges credit card]
"Would you like your receipt?"
"No, thanks"
"What name would you like on the order?" (while holding credit card with name on it - hence this step is meant to increase intimacy)
"Jack"
"Ok, here is your drink"
--
The Square system makes transactions shorter and simpler, and it humanizes the experience
/shoutAtClouds
Square's business model is transactional. It's not advertising based!
"compiling a list of my purchases" Visa, Amex, Discover, Mastercard... All do this and are transactional.
"to sell to annoying advertising companies" And this.
PS - Anyone noticed how they seemed to be stepping around the idea of those local businesses being other coffee shops? Craft businesses in the Press Release...like craft coffee shops?
And Square, Inc. is making a brilliant "Trojan Horse" series of business moves to bootstrap adoption in both users and vendors. They get vendors using the Square app by providing plastic processing, they get users using the app by providing convenient tabs... as smartphones become ubiquitous, they don't have many limits to growth.
NFC on the other hand... Who is going to be the jockey that rides NFC in the race? Google? What will Google be able to offer to vendors that Square doesn't? I can't think of a single benefit of NFC over Pay With Square from the vendor's point of view. And Google will never pound the pavement the way Square is. They just have too many other fronts to fight on.
Care to evidence that assumption just a little bit?
According to the Square App, I have to drive 11 miles away to find the nearest accepted location.
Ultimately, I think both will operate in parallel for quite some time until Apple decides to release something and takes over the world of payments overnight. :)
If Square could do a GoCardless with all those consumers that use Square, both Square and merchants could benefit massively...
If it's just for US stores then the title should probably be amended. Being a Canadian, I've never seen a merchant using a square device.
I'm going to optimistically assume that Square have run the numbers and this deal is worth the price though. As a marketing exercise alone it could be worth a fortune if it ends up putting Square's branding in every Starbucks.
Very much so. People who see a Square dongle at the farmers' market will now go "oh, I saw that at Starbucks", not "that guy might steal my credit card with that".
Last I checked, Square had not published the transaction fee they negotiated with Visa.
This is divergent, but I feel compelled to defend Amex here on the basis of quality of leads and consumer ethics, with the main contention being a higher processing fee for Amex relative to Visa and Mastercard.
# Quality of leads
"Amex cards account for approximately 24% of the total dollar volume of credit card transactions in the US, the highest of any card issuer" [1].
In general, merchants absorb credit card fees because they allow consumers to make purchases in more spur-of-the-moment situations. For example:
* "I want this $4 coffee, but I don't have cash. Without a credit card, the purchase would not occur."
* "I want this $1000 refrigerator, but I lack the cash to pay for it all at once. A credit card allows me to purchase it now and deal with the implications later as I pay for it over time."
* "I want this $1000 refrigerator, but I don't normally carry that much cash on me, so making this impulse decision is enabled by my credit card."
* "I want to buy a $400 lunch for our client, but I can't have direct access to my company's money."
American Express may charge a higher percentage per transaction, but Amex users in general spend 2x-4x per transaction relative to other credit-based cards [2], thus in the end justifying their higher fee per transaction overall in the business that credit cards generate. This is due to both the demographics of consumers using Amex and the higher percentage of businesses using Amex. Thus, the lattermost two situations above are ostensibly inflated for Amex, therefore justifying a higher percentage fee.
For smaller retailers, they may see that only 10% of their customers use Amex, but they may neglect to factor in the whole buying process of "I lose ~20% of revenue if I refuse Amex, because Amex users spend double per month, so the 50% upcharge over Visa/Mastercard is justified." Starbucks understands this, which is why they do not refuse an Amex for a $1 cookie - they understand that the guy purchasing $30 of coffee for the business meeting is likely doing so on a company Amex.
So, while a retailer may be angered by the occasional Amex user who brings tighter margins, in the overall scope of things the quality of lead is sufficiently higher for Amex users to justify a higher percentage fee.
Note: Here I use "quality" for a lead to represent frequency of purchase, per-purchase volume, and credit reliability.
# Consumer Ethics
I personally use an Amex charge card for my day-to-day transactions because of the revenue breakdown of Amex verus the other major cardholders.
"Visa and MasterCard get about 20% of their revenues from merchant fees. American Express gets 65% of its revenues from merchant fees, because it relies less on interest payments (most American Express card holders don't carry a balance)." [3]
This is an opportunity for me to 'vote' with my pocket book, and I think that the yearly cost of an Amex justifies the service. A fradulent transaction is easy to erase because American Express profits from me as a happy and successful consumer. Furthermore, with a charge card, I cannot dig myself into a pit of debt - if I cannot pay my transactions one month, I cannot continue charging the following month, thus hurting both me and American Express. The business model is profitable when I balance my finances and maintain good finances, whereas the other major card companies profit mainly when I start to fall into a pit of debt. I feel that this revenue model thus benefits me as a consumer, rather than intentionally setting me up for failure.
--
Overall:
As an entrepreneur building my own businesses, I accept Amex because I value the free market decisions of my consumers to use Amex, and in the overall scope of transactions, their educated decision behooves both of us.
--
[1] http://en.wikipedia.org/wiki/American_Express
[2]http://www.wikinvest.com/stock/American_Express_Company_(AXP...
[3] http://seekingalpha.com/article/20331-guide-to-credit-cards-...
Real citation needed. That Seekingalpha link is very wrong. Visa and MasterCard probably derive 100% of their revenues though merchant fees and similar. They neither lend money nor collect interest from consumers. The usurious interest rates and fees that you are trying to "vote" against are coming from the banks that issue the cards. Visa And mastercard profit by encouraging use of their card networks for every purchase. They don't care about your "pit of debt."
I'm not sure how paying an annual fee to Amex and forcing merchants to process your expensive card is helping anyone other than further enriching Amex, which in addition to being a payment network, is also operating as a bank as far as extending loans to and collecting interest from its "cardmembers." If Amex's other value added services such as rewards, return protection or whatever make it worthwhile, for your business to pay the membership and merchant fees then so be it.
My personal "vote with my dollars" strategy is to use cash for transactions where a credit card does not add value to my user experience and not to unnecessarily punish businesses with small purchases on credit. I use a Visa card because it is accepted most everywhere. I do use a "rewards" card so I do carry some guilt for any extra merchant fees that may incur.
- Pay for gas at the pump: credit.
- Pay for online goods: credit.
- Pay for an expensive item with not enough cash in pocket: credit
- Pay for a $2 coffee: cash
- Pay for a round of beers at the pub (where a credit card will add an extra round trip for the bartender to get back to me): cash
- Pay for anything at a local restaurant: cash
- At McDonalds and somewhoe don't even have $2 in my pocket: credit
http://media.corporate-ir.net/media_files/IROL/21/215693/Vis...
I would assume that most Amex users always have another method of payment, considering how likely they are to run into a situation where Amex is not accepted.
With this logic, the business will only lose revenue from customers whose only form of payment is Amex - I think this would be a small subset.
Personally I use amex for all large transactions because they give me a cut (I think around 0.5% cash equivalent?) in air miles, but don't usually bother with it for small transactions because I don't want to risk it being turned down, or take the piss with small merchants who might suffer from the processing fees.
Perhaps this kind of behaviour explains their bigger cash volume, rather than their customers necessarily being bigger spenders in total across all the cards available to them.
So you keep your phone in your pocket, walk into Starbucks and order a drink as you do every morning. You tell them "put it on John's tab." You get a receipt in your email immediately thereafter, and never have to pull out your phone or wallet.
Wouldn't the proximity of your phone mean they would take the payment from you even though you haven't authorized it?
I don't see the value for Starbucks customers either.
Smart phone based wallet, a la Google Wallet.
Let us not forget that there may be a dichotomy in processing fees of credit cards at Starbucks between register-based transactions and digital/mobile-based Starbucks card reloads. Square doesn't have to beat the former to be competitive - only the latter, because it seems that Square will be on track to replace the current smartphone scanners at Starbucks registers.
Let us also not ignore that this is Starbucks offloading liability - when dealing with payments on a massive scale, one has to deal with a variety of frauds that may occur. With the current Starbucks card reloads before the point of sale, they may be starting to encounter fraud based on the volume of sales they encounter. However, Square has essentially specialized in managing this type of fraud. Hence, the Square partnership could simply be an acknowledgement that the Starbucks card payment system has become mainstream enough that it justifies a dedicated security division, whether it be internal or external, and that Starbucks opted for external Square.
Unless you mean that Square is providing the service at a loss to Starbucks?
* If a consumer favors their Amex over their other cards, then they favor retailers who accept Amex. Thus the higher fee is justified with more repeat business.
* My mother's company has one line of credit: her Amex. If her Amex is refused, she has to pay with her personal credit or debit card, then go through the rigmarole of a personal refund. In corporate America, Amex is the standard due to its ease of internal accounting and external reputation. With the former, the better reporting of transaction information justifies its use in the accounting department. With the latter . . .
* Amex has established itself sufficiently as a luxury brand,
e.g. if you take your client out to lunch, it could be out-of-place to pay with anything but an Amex.
Furthermore, if your business does not accept Amex, it alienates luxury-seeking consumers
e.g. if a Michelin-starred restaurant refused an Amex card, it would experience a more precipitous drop in return rate than if a neighborhood diner refused Amex.
* "the business will only lose revenue from customers whose only form of payment is Amex" -> This is true on a per-transaction basis, but I defined "quality" to include repeat business and, per my first above point about business, restricting consumers could discourage repeat business.
I use Pay With Square all the time—at tiny bakeries, big coffee shops, and restaurants. No one will look at you lost.
It's convenient because I don't need my wallet, I don't need to sign a receipt, and I don't need to do anything other than order and walk away.
Maybe eventually Square will let you link it to a bank account or prepaid account and they'll keep the spread.
Square has a lot of options in the way they process transactions, and they have a very high volume (now more so than ever)
They can afford to break even on the conventional credit card side of the business if they can make their margins on Pay with Square.
* The fact that they pay an annual fee (even with Zync) means that they have "skin in the game" - if they use the card more, the fee is diluted on a per-purchase basis.
* "customers are rich" - it's not necessarily that customers are rich, but that they spend more per month. This more specifically applies to business customers. For example, my carpentry business could use Amex as the company card, and while I could spend a lot of money per month buying carpet to install, it doesn't mean that I am rich.
* Higher income can disproportionately correlate to dispensable income, and credit cards are more likely to be used on dispensable income (e.g. restaurants) rather than more core needs (e.g. rent)
* " Various sociological statistics suggest the severity of wealth inequality 'with the top 10% possessing 80% of all financial assets [and] the bottom 90% holding only 20% of all financial wealth.'" [1] -> Even if Amex just offers their cards to rich people, it's an objectively viable business model that in itself justifies the higher transactional fee.
--
[1] http://en.wikipedia.org/wiki/Wealth_inequality_in_the_United...
When a “tab” is set up, the app can register with iOS to receive notifications when a user enters the geofenced region. As usual, the app will be suspended when you close it (i.e. not running), but when iOS detects you’ve entered the region, it’ll move the app into the background so it can run temporarily. In the case of Square, they might get a better GPS fix on you and tell their servers that you’re actually really close to where you have a tab open.
I think there are two big reasons why they would do this: 1. Investment They will likely make a multiple of the $25M when Square IPO's. The best possible evidence of Square's traction is what Starbucks just provided. Smart investment 2. Focus on core competency World class payment processing is not a significant source of competitive advantage for Starbucks, but it is for Square. This deal allows Square to worry about payment acceptance & processing efficiency, and Starbucks to focus on product/service. Michael Porter would be proud of this deal.
But I don't mean to imply that's the only factor. I agree about the investment.
Moreover there's the customer experience of paying with Square. It's nice and you don't have to set up a Starbucks card and put money on it. You just pay. It delights customers and may move lines faster, but perhaps most significantly, it lets Starbucks track loyalty. The business value of that is tremendous.
Starbucks basically just upgraded their app in a big way. Remember they were the earliest pioneers of "pay with your iPhone" with ther Starbucks app.
It doesn't hurt that Square is associated with small scale "craft" businesses either. Starbucks is trying to revitalize their brand right now.
A geofenced app -- if not Square, then Apple Passbook or others -- could prompt me on my own device's screen: "The vending machine here requests $1.50 to dispense your Snickers. Press 'pay $1.50' or 'cancel'."
The soft-interface device screen is much more flexible than the NFC-tap/wave-in-the-right-place gesture. Your own device screen will be better for doing things like:
• pre-authorizing a purchase before buying a tank of gas
• requesting an emailed receipt
• offering immediate feedback (or adding a tip)
• avoiding possible confusion/chargebacks about amounts paid.
That could mean 'app-style' payments have not just usability benefits, but also cost and legal benefits over 'NFC-style'.
- constant location polling is a battery drain
- GPS reliability/speed degrades quite a bit indoors (are you at Starbucks or the shop next door? What happens when another Mr. Gojomo next door orders coffee and the cashier is rushed and doesn't notice the different face?). WiFi isn't much help here either if you're in a large urban area.
You can still do all you listed starting with a NFC handshake instead of playing with GPS. Geofencing is helpful for getting payments onto existing phones (not to downplay Sq's achievement here), but NFC or another more localized technology will be necessary to make payments more reliable.
So we're relying on the cashier to care deeply enough to do this validation.
Remember the phase when credit cards were being issued with a picture of the card holders face on the front? And all the stories about the card with a picture of a petite Indian female being used by a large white male to ring up purchases?
I like the concept of Square, and I'd like for this to work. But the cashier being a face-recognition gateway seems like a horrible idea.
Making payments too easy makes it easier on the bad guys as well.
Either way you look at it, Square's transaction volume surges with this deal. Good on both parties.
Now that being said, we get an SMS on every transaction, and for online transfers, we have two factor authentication using the mobile phone. We can call the bank any time to report a stolen card and would be covered for a fair amount of money depending on the account, as long as you report it within 24 hours as I remember.
[0] - http://www.msnbc.msn.com/id/11697094/ns/business-consumer_ne...
http://consumerist.com/2010/09/amex-visa-mastercard-all-give...
In any case, plenty of people do struggle with it- the old especially. But that's not the biggest factor. With a swipe everything is done by one person- the cashier. PIN entry requires a back and forth between customer and cashier, and I've seen plenty of cashiers not notice that the PIN entry has gone through, etc.
On a tangent, it seems like people here have more of a negative view on credit cards - as if they assume you only use one if you can't actually pay. As long as you pay off your bill each month there is no real downside for the customer.
Some merchants discourage this by insisting on a 15 euro minimum charge. But by and large cards are used more often than cash. In restaurants it is common to split the payment of the meal and have each person contribute via a card.
It's been that way for years, although the frequency of card use is not as overwhelming as in the US.
At the supermarket, if I buy a bottle of water (0,18) I pay with a credit card. The majority of people do the same thing.
Caveat: many people, especially free-lancers, are paid in cash to avoid paying taxes on part of their income. Those people pay cash for everything. The give-away is the use of big bills (50, 100 euro bills) for small purchases.
Also enjoyed the spectacle of tobacconists not knowing to swipe my less-secure magnetic strip, looking for my smart card chip.
The idea probably is: It's easier and simpler to withdraw 200 bucks once and pay in cash at the different stores instead of having to enter the card and PIN every time you purchase something.
as well as my haircut place, a few sandwich shops, and a drink spot.
I feel like the Starbucks is catching up with their more efficiently operating 'local' competition. But its still a great move.
It is worth noting minimums can not be set for debit card transactions.