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.