How Square and Starbucks made mobile payments mainstream

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Every revolution has its tipping point, and for the mobile commerce revolution, that signature moment arrived Tuesday, when Starbucks announced it would begin processing all credit and debit card transactions using Square's mobile transaction technologies. Sometime this fall, all 7,000 company-owned Starbucks stores across the U.S. will dump their existing point-of-sale technology in favor of swiping consumers' cards through Square's trademark dongle, which plugs into a smartphone or tablet audio jack. For Starbucks, the move is about slashing costs: Square charges a flat fee of 2.75 percent on all card transactions, and the startup's co-founder and CEO Jack Dorsey hinted to Reuters that Starbucks may be getting an even more favorable deal than that. "Obviously, as you scale up you do see reductions in cost, and Starbucks is a very significant scale compared to a lot of other merchants in the world," Dorsey said.

And for Square, scale is what this is all about. As of June 2012, more than 2 million businesses and individuals are using the Square service, up from 1 million just six months earlier, with users processing more than $6 billion in payments on an annualized basis. But the Starbucks deal changes everything, not only because it extends Square into so many new locations but also because the partnership brings its services to a customer base already embracing alternatives to conventional cash and plastic. The coffee chain's own Starbucks Card Mobile App--which connects iPhone, Android and BlackBerry devices to the consumer's prepaid Starbucks Card account, enabling users to pay for their order by holding their smartphone in front of a countertop scanner and processing the app's on-screen barcode--is well established as a viable payment option, accounting for more than 1 million transactions every week.

Starbucks will continue to offer the Starbucks Card Mobile App; it also will support the Pay with Square application, available for iOS and Android. Pay with Square allows consumers to make purchases and settle tabs without ever removing their mobile device from their pocket or purse, leveraging geofencing technology to identify when a user's smartphone is within 100 meters of a participating merchant. Consumers who've opted into the service and attached a credit or debit card to their Square account can automatically open a tab with the retailer and complete the transaction simply by giving their name; the merchant version of Pay with Square also shows the user's photo to guarantee against fraud.

Add all these different options (cash, credit and mobile apps) together, and tech-savvy Starbucks customers have more payment choices at their fingertips than ever before. No less important, these choices aren't limited to only a handful of smartphones, like rival Google (NASDAQ:GOOG) Wallet, and they aren't dependent on dramatic retail infrastructure changes like Near Field Communications-based contactless payment services. This isn't about "if" or "when"--it's about "now."

Starbucks embracing Square is such a logical evolution that the only thing surprising about the deal is that it didn't happen sooner. Their respective m-commerce visions are uniquely complementary, making them the ideal partners to push mobile payments into the mainstream--and now that they're doing so, consider the floodgates officially open. "Anyone who's going to break the mobile payments barrier in the U.S. has to overcome the resistance to try anything new when everything we have works really, really well, even cash, which is very convenient," Bill Maurer, director of the Institute for Money, Technology and Financial Inclusion at the University of California, Irvine, told The New York Times. "But if a big merchant jumping into some mobile payment solution signals to other merchants that there is an opportunity here, that might change the psychology for other merchants." There's no doubt that retailers of all shapes and sizes must now give mobile payments their full attention--and those who don't experience a change in their psychology should have their heads examined.--Jason

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