Earlier this year, Starbucks partnered up with Square Inc., a company reaching for the spotlight with its mobile payment service. For those of you in the dark, Square has been gaining more recognition in Silicon Valley, especially after the Starbucks partnership was announced. Unless you follow the tech industry closely, very few people know about Square and its goals. Starbucks hopes to change that, and news of its investment has given Square some much-needed exposure.

SEE: Valuing Startup Ventures

What Is It?
So what is the ubiquitous Square that everyone is now talking about? Originally, Square made a mobile payment product that was square shaped. The hardware would allow you to swipe credit cards and could be attached to your mobile phone much in the same way that headphones are. Today, the company has gone mobile with an app called "Pay With Square."

This app allows users to download their card or debit card information and then use their phones to make payments at participating businesses. While Starbucks plans to maintain its own payment system, its investment in Square will allow 7,000 Starbucks locations to use Square's software to process all non-cash payment transactions.

A partnership with Starbucks is just what Square needed to make it the dominant startup in mobile payments. For Starbucks, the investment also looks like a no-brainer, as it will allow Starbucks' customers to pay for their morning java via smartphone. The appeal for Starbucks is obvious: Starbucks has small transactions from customers who often need quick service. Being able to walk in, place an order and pay with your phone should please Starbucks' on-the-go customers.

To be sure, Starbucks already has its own mobile payment option via its own Starbucks mobile app, but that only works with a Starbucks card. Square opens the door for Starbucks' customers to use both credit and debit cards. Starbucks' investment in Square comes after an earlier investment in Square made by credit card processor Visa.

SEE: Credit, Debit And Charge: Sizing Up The Cards In Your Wallet

Get Ready for the Competition
While Square may now have center stage in the world of mobile payments, the idea of a mobile payment network is getting a big push from technology companies. The potential market space is enormous. Square alone is estimated to process $6 billion worth of transactions in 2012, and the company charges a 2.75% processing fee. Once Square is fully integrated into the Starbucks system, its transaction volume will skyrocket. Starbucks sells over $13 billion worth of food and beverages a year and I would bet most of those sales occur via debit and credit card.

The opportunity here is huge for all parties, which is why it comes as no surprise that giants like Google are working furiously to develop mobile payment networks. Moreover, wherever there is a significant Google presence, you can bet that Microsoft is lurking close by. Even eBay, which owns PayPal, is working on a mobile payment platform that will allow its buyers and sellers to have an even more pleasant buying and selling experience.

With more everyday activities being performed over the Internet, cash is becoming a less relevant source of payment. Just consider online retailing giant Amazon, which now sells virtually everything under the sun online. Last year, Amazon sold nearly $50 billion worth of goods, most of which were paid for via credit. Knowing Amazon's propensity to spend money on growing and developing its infrastructure, you can bet that Amazon CEO Jeff Bezos and company is paying very close attention to this mobile payment race.

SEE: Shopping Online: Convenience, Bargains And A Few Scams

The Bottom Line
This partnership between Starbucks and Square will likely spur more interest in the mobile payment space. Smartphones are becoming as indispensable as wallets. The natural progression is for the phone to become a payment mechanism. Now the race is on and Square currently has the pole position. However, tech companies are sitting on billions in excess cash, looking for the next growth channel. We may all be using our phones to make payments sooner than anticipated.

Related Articles
  1. Budgeting

    Bespoke Post Review: Is It Worth It?

    Find out if Bespoke Post, the fast-growing, e-commerce subscription service for men's lifestyle and grooming products, is worth all of the hype in this review.
  2. Stock Analysis

    The Biggest Risks of Investing in Costco Stock (COST)

    Read about some of the biggest risks of investing in Costco stock. Gain a better understanding of its business model before buying in.
  3. Stock Analysis

    The Top 5 Retail Penny Stocks for 2016 (TWMC, DXLG)

    Find out which retail stocks trade for less than $5 a share. Learn about bargains that can avoid bankruptcy and produce nice returns for investors.
  4. Stock Analysis

    Wal-Mart's 3 Most Profitable Lines of Business (WMT)

    Learn about the key drivers of Wal-Mart's profitability as the company is concluding its fourth quarter, which is the period of its highest sales and income.
  5. Stock Analysis

    Why You Shouldn't Bet Against Bezos, Amazon (AMZN)

    Amazon disappointed Wall Street for the fourth quarter, but ignoring those expectations and paying attention to the underlying numbers is often wise.
  6. Investing Basics

    4 Value Plays in the Retail Sector for H1 2016 (BBBY, WMT)

    Discover four value stocks of companies operating in the retail sector that can prove valuable investments for the second half of 2016 and beyond.
  7. Stock Analysis

    The Top 5 Micro Cap Retail Stocks for 2016 (KIRK,TCS)

    Identify five promising micro-cap retail stocks that all growth investors should have their eyes on when making portfolio decisions for 2016.
  8. Stock Analysis

    Party City Holdings: How It's Fared Since Its 2015 IPO (PRTY)

    Learn about Party City Holding's performance as a public company. Investors would have lost much more than the Russell 2000 Index by investing after the IPO.
  9. Retirement

    Harry's Review: Is It Worth It?

    Find out if Harry's, the fast-growing, online purveyor of low-cost razor blades and shaving kits, is worth all of the hype in this review.
  10. Budgeting

    Manpacks Review: Is It Worth It?

    Find out if Manpacks, the fast-growing e-commerce subscription service for men's grooming products and underwear, is worth all the hype in this review.
RELATED FAQS
  1. Does QVC accept debit cards?

    QVC accepts debit card payments as one of its many payment options. The company, which is the world’s leading video and e-commerce ... Read Full Answer >>
  2. Does QVC charge sales tax?

    QVC, an American TV network, is registered with states to collect sales or use tax on taxable items. QVC is also required ... Read Full Answer >>
  3. Can you pay off a Walmart credit card in store? (WMT)

    Wal-Mart Stores, Inc. (NYSE: WMT) allows multiple payment options for its credit cards, including in-store payments. The ... Read Full Answer >>
  4. Does Walmart take international credit cards?

    Foreign visitors to Walmart locations in the United States can use their credit cards issued by banks outside of the U.S. ... Read Full Answer >>
  5. How can I invest in electronic retailing (e-tailing)? (AMZN, W)

    Electronic retail is one of the fastest growing segments of the economy. Every year, more people are choosing to purchase ... Read Full Answer >>
  6. What is the difference between JIT (just in time) and CMI (customer managed inventory)?

    Just-in-time (JIT) inventory management focuses solely on the need to replenish inventory only when it is required, reducing ... Read Full Answer >>
Hot Definitions
  1. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  2. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  3. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  4. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  5. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  6. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
Trading Center