[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.