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. Professionals

    Why Near-Retirees Shouldn't Sweat the Volatility

    With the stock market bumpy, some folks nearing retirement might be nervous. Here's how to create some wiggle room for your portfolio.
  2. Professionals

    Fund and ETF Strategies for Volatile Markets

    Looking for short-term fixes in reaction to market volatility? Here are a few strategies — and their downsides.
  3. Stock Analysis

    The Biggest Risks of Investing in Amazon Stock

    Find out which risks are most important to Amazon's shareholders. Learn which operational risks impact share prices and which financial risks affect investors.
  4. Stock Analysis

    How Does Jet.com Work and Make Money?

    Learn how Jet.com is taking on retail giants Amazon, Walmart and Costco by promising to save customers an average of 10 to 15% on over 10 million items.
  5. Stock Analysis

    Top 3 Stocks for the Coming Holiday Season

    If you want to buck the bear market trend by going long on consumer stocks, these three might be your best bets.
  6. Investing News

    This is the Fastest-Growing Consumer Complaint

    There’s no way to guarantee that your Social Security number won’t fall into the wrong hands. Here are some ways to make yourself less of a target.
  7. Stock Analysis

    How Does Casper Work and Make Money?

    Learn how the startup Casper is delivering a good night's sleep directly to customers' homes for a fraction of the cost of the competition.
  8. Stock Analysis

    4 Catalysts That Could Propel Best Buy's Stock Forward

    Understand the current Best Buy model and why it has been failing lately. Learn about the top potential catalysts that could increase Best Buy's stock price.
  9. Mutual Funds & ETFs

    ETF Analysis: iShares Globl Consumer Discretionary

    Explore analysis of the iShares Global Consumer Discretionary ETF, and learn about the suitability of this fund that tracks the consumer discretionary sector.
  10. Economics

    Is Facebook Positioned for Long-term Success?

    Facebook is the world's dominant social ecosystem, with a massive reservoir of user photos and data
  1. How can I invest in electronic retailing (e-tailing)?

    Electronic retail is one of the fastest growing segments of the economy. Every year, more people are choosing to purchase ... Read Full Answer >>
  2. 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 >>
  3. What are some common ways product differentiation is achieved?

    There are many ways to achieve product differentiation, some more common than others. Horizontal Differentiation Horizontal ... Read Full Answer >>
  4. What economic indicators are important to consider when investing in the retail sector?

    The unemployment rate and Consumer Confidence Index (CCI) rank as two of the most important economic indicators to consider ... Read Full Answer >>
  5. What factors make it difficult to compare performance ratios between retail stocks?

    Companies that operate in the retail sector significantly differ in terms of their profitability and efficiency, making stock ... Read Full Answer >>
  6. Which socially responsible retailers appeal most to ethical investors?

    Ethical investors have many reasons to consider companies in the retail sector. The sector is broad and features an abundance ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  2. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  3. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
  4. Normal Profit

    An economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero.
  5. Operating Cost

    Expenses associated with the maintenance and administration of a business on a day-to-day basis.
  6. Cost Of Funds

    The interest rate paid by financial institutions for the funds that they deploy in their business. The cost of funds is one ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!