[abalone]

Here's what's in it for Starbucks: Square's cheaper.

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...

[pja]

"We'll lose money on every transaction, but make it up on volume!"

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.

[ceejayoz]

> 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".

[jeffgreco]

Starbucks won't be using any Square dongles. I'd imagine there will be a small sticker at their normal POS. src: http://www.splatf.com/2012/08/starbucks-square-payments/

[ceejayoz]

Whether it's a dongle or a logo, the benefit is still essentially the same - recognition of it as a payment brand on par with Visa/Mastercard.

[jusben1369]

I would point out that it's unlikely SB's received the same financial terms offered to Mom and Pop vendors who sign up via the website.

[whalesalad]

Absolutely. This has got to be a huge partnership and I'm sure everything is going to be custom/branded. I'm anxious to see how Starbucks handles this. Will they use iPad kiosks that the user can interact with? Part of the Starbucks experience is being able to custom order a half-caf splash-of-cinnamon dolce latte with soy. Having a nifty UI to deliver that experience + an easy way to pay might be a good strategy. Will this tie in with their own Starbucks app so that I can order on my walk to Sbux, auto pay, and then walk out without waiting in line?

[abalone]

Maybe, but they wouldn't need to for the deal to be attractive. Square's regular rate is already below wholesale processing for small transactions.

[jusben1369]

The largest retailers though can negotiate less than wholesale. But you raise a point. What attracted SB's to the deal? Lower transaction fees or incremental sales due to a simplified paying process? It can be both but it's probably not 50/50. I suspect one was the driver and the other gravy.

[vitek]

The largest retailers can negotiate the processing (merchant acquiring fees), but not the interchange. Components of CC fees are interchange (which goes to card issuing banks), processing (which goes to the merchant's bank), and association fees (which is how visa/mc/etc make their money). Interchange & association fees are fixed, processing is the most negotiable. That said, any >$1B retailer is paying too much if they pay more than a penny/transaction in processing, so there's not much room for improvement because there are real costs in that activity.

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.

[abalone]

What I mean is Square is below interchange for the typical Starbucks purchase. They subsidize them. That's probably an 8 figure value for Starbucks, annually.

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.

[archangelzx]

I'm sure part of it deals with space as well. Their registers take up a large portion of their counters. Also with a portable register they could move down the line much faster (akin to the order-takers who walk down the line at in-n-out.)

[adg]

> Visa charges Square 1.76% + 6 cents

Last I checked, Square had not published the transaction fee they negotiated with Visa.

[abalone]

Interchange is a fixed non-negotiable set of rates, published by Visa & Mastercard. See http://usa.visa.com/merchants/operations/interchange_rates.h...