
Starbucks, monetary superpower - overwhelm
https://jpkoning.blogspot.com/2019/08/starbucks-monetary-superpower.html
======
Diederich
15 or so years ago, my manager at WalMart Stores Information Systems Division
was previously a programmer on one of the many finance related teams.
Specifically, she worked with gift cards, and one time I asked her how
different state laws affected how much money WalMart could recover from those
cards. She was _delighted_ to elaborate!

I don't recall the particulars of the answer, but it was eye-opening. She said
that they had a team of lawyers whose job was to (try to) keep track of all of
the laws, all over the world, that had any bearing on this topic. Not only was
it state and federal law, but also county and even city law. (And
territories...and military bases....etc.) There were some stipulations about
where the card was bought AND where the card was used, if in different
jurisdictions. Many of the laws were contradictory. In some cases, none of the
money could be reclaimed, and would revert to different local funds. There
were effectively _endless_ permutations.

She and her team had to decide what of all of this they would model with code.
They could not model all of it, so there was a hybrid of some actions being
taken with the code, and the code outputting reports that humans would use to
make decisions about actions.

It was eye opening to consider how legally complex many such 'simple' things,
like gift cards, are when implemented on a wide scale.

~~~
mbesto
> It was eye opening to consider how legally complex many such 'simple'
> things, like gift cards, are when implemented on a wide scale.

To the armchair HN community who ask "why does it take 1k engineers to run
<insert random silicon valley app that operates at global scale>". Here is
your answer.

Note - to be fair, yes many of these team are indeed bloated and work on
projects that are a result of NIH syndrome, where "buy vs build" decisions
just automatically default to "build". Ask anyone at Amazon if they enjoy
working with the code on their custom internal ERP system and you'll know what
I'm talking about.

~~~
TeMPOraL
> _To the armchair HN community who ask "why does it take 1k engineers to run
> <insert random silicon valley app that operates at global scale>". Here is
> your answer._

I think the usual question isn't why a random SV app yas 1k engineers, but why
does it have < 100 engineers and 2k+ administrative and sales&marketing
people.

The answer is the same, but let's be clear: this is not an engineering job.
It's legal and sales job.

~~~
jjeaff
I don't think many really say that about monsters like Amazon. It's usually
these very limited in scope and functionality like Twitter that boggle the
mind.

------
nlawalker
One use of Starbucks gift cards not mentioned in the article: cashing out
foreign currency.

"When you’re leaving a foreign country and still have some of the local
currency, take it to a Starbucks and load it onto a gift card. You can use the
card later in the UK, USA, Canada, Australia, Mexico, and the Republic of
Ireland."

[https://lifehacker.com/put-leftover-foreign-currency-on-a-
st...](https://lifehacker.com/put-leftover-foreign-currency-on-a-starbucks-
gift-card-1833095163)

~~~
joncrane
So they don't charge any explicit foreign exchange fees, but

"Currency conversions are based on currency exchange rates applicable on the
date of the Transaction." Well can't they just use a super advantageous
measure there? There's no pinning to any external rate in the language.

~~~
notatoad
yes, they absolutely can. but they don't. They aren't trying to run a forex
business, they're trying to sell coffee so they charge a fair rate.

it's not going to be the best rate possible, but it's probably a better rate
than anybody else at the airport will give you.

~~~
dragonwriter
> yes, they absolutely can. but they don't.

[citation needed]

> They aren't trying to run a forex business

Right. Particularly, they aren't trying to sell services to people price
shopping for forex, is an incidental convenience provided to a customer base
that literally isn't even checking prices.

Why you'd assume that the rates will be especially favorable is unclear.

~~~
notatoad
i'm not assuming anything. when i use my canadian starbucks card in the US i
have always been given a fair exchange rate.

------
8bitben
_As for Wayne, while he may earn an implicit interest return in the form of
Starbucks points, by forgoing a card payment he 's giving up on the associated
cash-back or airline points._

I don't agree with this. While merchants pay interchange fees based on the
value of card transactions (plus a flat rate per transaction IIRC), as a
cardholder rewards are earned only as a percentage of the total purchase, and
are _not_ influenced by the number of transactions.

So I earn 4% back on the value of all my Starbucks transactions, regardless of
whether the purchase is made via the app or my card. I am willing to forgo a
couple pennies in interest on my rolling $15-20 balance to have the
convenience of mobile ordering.

If you use the system efficiently, I see it as a net value add as a customer.

~~~
ben1040
Yep. And you're still getting any special merchant-specific rewards the card
company might offer you. I just reloaded my Starbucks card using my Amex, and
Amex had a promo that offered a 10% credit back on Starbucks purchases, up to
$5.

So I threw $50 on my card, I get 10% off the coffee, and earn back a bit on
the Starbucks reward points.

------
pweezy
I've always thought that the main reason for Starbucks to push their card and
reward program is to save on per-transaction credit card fees.

By my understanding, in the US, typical merchant fees to accept a card are a
flat $0.20-$0.30 transaction fee, plus 2-3% of the total dollar amount.

The article mentions the interchange fee (the 2-3%), but for small purchases
the transaction fee is more significant.

I assume the majority of purchases are individuals buying a single beverage.
If an average drink costs $4, a $0.30 transaction fee alone is eating 7.5% of
your gross revenue. That's an absolutely huge amount.

Even if Starbucks cards are bought/topped up with a credit card, that $0.30
fee is being amortized over $20+ worth of product instead of $4 worth.

I also figured this tied in with Starbucks' contract with Square some years
back - as one of Square's value props is eliminating the per-transaction fee
for credit cards. Not sure why that was cancelled, though.

~~~
burtonator
This is a great example of a HUGE competitive advantage Starbucks has over
regular merchants that's very unfair. Smaller merchants don't get the scale
advantages here...

~~~
paganel
To be honest some of those smaller merchants can also make better coffee than
Starbucks, and as such they can ask for slightly higher prices for said better
coffee without their customers complaining.

~~~
seanmcdirmid
No one goes to Starbucks for the high quality of their coffee. They go for
convenience, maybe atmosphere (a safe comfortable place to hang for awhile),
and such. But if you want great coffee, that is a trade off that doesn’t favor
Starbucks (like a burger conesuire at McDonald’s).

~~~
lsc
>maybe atmosphere (a safe comfortable place to hang for awhile),

So I mean, coffee shops in general, yes. But at least in urban areas?
Starbucks seems to be really well-designed to maximize throughput and profit;
they have fewer seats, usually per cup of coffee sold than the smaller coffee
places, and generally seem to be set up for 'to go'.

It's one of those things where if I look at it as an investor, I really like
it, but if I look at it as a consumer, the opposite.

~~~
seanmcdirmid
What urban areas? Seattle? No, downtown stores have seats, there are very few
togo stores, heck the one near the library is pure plush seat forest (the one
in Paris near the grand opera is like that also). You can’t operate togo
stores at all in China, where your sales volume is strictly limited by the
amount of seating you have (unlike the USA). Tokyo has the best seating I’ve
ever seen in a Starbucks, maybe NYC?

It really depends on the market, I guess.

~~~
lsc
mm. in santa clara, redwood city, san francisco and Los Angeles, Starbucks
usually have few places to sit (compared to local coffee shops) - and are
usually way busier (compared to local coffee shops) and usually don't offer
mugs; they just have to-go cups (or bring your own mug) - while most of the
nicer local places give you a mug by default if you say it's 'for here'

I mean, sure, they aren't 'to go only' \- but they are impractical places to
meet or hang out compared to most smaller coffee shops, just because they seem
to have a much worse (or, I guess as an investor, better) ratio of customers
to seats; a lot of time there are more people in line for coffee than there
are tables.

I'm not saying they don't have seating at all, just that they seem to be
optimized in a thoughtful way to sell as much coffee as possible, making them
superior (if you are an investor) but inferior if you want a place to meet up
with other people or hang out, when compared to the locally run and less-
optimized coffee shops.

------
ben1040
The part on "breakage" was interesting. I had recently searched my name on my
state's unclaimed property bureau and found I had about $15 and change to
claim.

I filed the claim form, and when I got the check, the checkstub said it was
from an unused Starbucks account balance.

If last year they had $155 million from abandoned accounts that they could
legally just pocket, I wonder how much they also had to send over to various
states' unclaimed property offices.

~~~
js2
Hey, I didn't even know about this. I just found $10 in my name. Thanks!

~~~
ben1040
You're welcome! That ten bucks is like 1.5 Starbucks visits.

------
cbhl
The magic trick here is that Starbucks Rewards -- their "free" loyalty program
-- requires using a Starbucks Card (virtual or physical) in order to make your
purchases.

Under the old system (prior to ~Apr 2019) you had to make $150 in purchases
annually to get "Gold" status, and then you got a free reward after every
~$62.50 in Starbucks spending. The new program has no minimum, and tiered
rewards between $12.50 and $200 of spending.

~~~
chipperyman573
You can get a virtual card in the app and "pay" with it by loading on the
exact amount you need to pay with before checking out (or just buying it in
the app). So it "needs" a card, but that's really just a weird thing they
didn't abstract from the app, it's not actually an inconvenience (at least to
me)

~~~
lxgr
As far as I remember, there is no way to load an exact amount, so you always
end up with some spare change in the app.

I assume that this is somewhat of an incentive to quite a few customers: That
almost-forgotten balance almost feels like a discount towards the next
purchase, not so much as a free loan to Starbucks.

------
maurimo
I keep wondering why people buy Amazon/Netflix Gift cards. Great, you
converted 50$ into 50$ that can only be used on Amazon, and people may end up
not using at all. This is also financing with negative interest rate.

~~~
lwf
If you don't have a credit or debit card it's one of the only ways to pay for
the service, save asking to borrow a friend's card.

According to the FDIC, 6.5% of American households lacked a bank account _at
all_ in 2017.[1]

[1]:
[https://www.fdic.gov/householdsurvey/](https://www.fdic.gov/householdsurvey/)

~~~
airstrike
But you could always go with one those reloadable debit cards, no? Though
those usually come with a fixed setup fee of, say, $5

~~~
banana_giraffe
It's actually fairly hard to get money onto those without paying a fee (if you
don't have a bank account). Most of the obvious ways to get money onto them
involve "Visa ReadyLink", and that comes with a service fee from $2 to $5. If
I recall correctly, some even have monthly fees if they get below a certain
level.

Amazon gift cards can be purchased without a fee most of the time, and with
less friction in the store then actually dealing with the service desk in the
store that does ReadyLink.

~~~
ghaff
>some even have monthly fees if they get below a certain level

If I receive one for some reason, I've learned to go straight to my computer
and load it into my Amazon account.

------
gumby
> But the only way to cash out of Starbucks balances is to buy a coffee--a
> promise that Starbucks can always keep!

By the way this isn't true in California: by law all stored value and store-
credit cards last for 10 years and can be cashed out.

~~~
ovao
But how does one cash them out?

~~~
patio11
You go to any Starbucks and ask the person operating the register to cash you
out. They push the button designed to facilitate this.

------
jahbrewski
Not so sure it's due to "coffee addicts" so much as the fact that Starbucks
gift cards became the perfect, generic, gift. How many times have you been on
your way to X, needed to bring a gift, and just run into Walgreens?

~~~
bitwize
Starbucks coffee and espresso drinks are "will do in a pinch" for me. I'd much
rather frequent a local coffee shop with better espresso than what Starbucks
serves.

I think Starbucks makes more money these days from its sugary cold drinks than
its hot coffee/tea/espresso.

~~~
jddj
For me too.

Starbucks is train station or airport "ehh, what did I expect?" coffee.

~~~
duskwuff
It's the McDonalds of coffee. Rarely surprising in either a good way or a bad
way.

------
ikeboy
>Keep in mind that each payment made through the Starbucks app is a payment
that isn't made by credit card. Since each credit card payment will cost
Starbucks 1-2% in interchange fees paid to the card networks and banks, the
company saves a lot of money by guiding customers to its payments app

Most of those gift cards are purchased by credit card as well. This point is
incorrect.

------
sarhus
Out of curiosity, the author mentions a possible alliance with another
companies (McDonald for example) that would share savings, breakage, and data.

Anyone would know if this kind of idea is behind or maybe related to Facebook
Libra?

~~~
aasasd
What's to know there? Obviously Libra will rack up loads of data on people's
spending. Obviously any kind of financial middleman organization these days
immediately invests money that it gets from clients for virtual bucks. (I'm
surprised to learn that PayPal is limited in this regard, but maybe this
report isn't the Singapore PayPal which serves European accounts?)

------
monikgandhi
This is mind blowing. I never thought about this while ordering coffee through
Starbucks app. It’s following the same model as Robinhood.

------
ic4l
Back in 2012 I found an exploit [1] that let you fabricate card balances. They
fixed it 2012, but in 2015 another person found the same issue [2].

I have no idea why they would not be using transactions, and make the same
mistake twice. It really does make me wonder how much FAKE money is inside of
that BILLION DOLLAR pot.

I also found similar issues in 2017 for their Thailand division. But this is
at least understandable as Thailand operates its own Gift Card system.

[1] [https://chadscira.com/post/556999d91cb00914380006ee/Re-
Starb...](https://chadscira.com/post/556999d91cb00914380006ee/Re-Starbucks-
unlimited-coffee) [2]
[https://sakurity.com/blog/2015/05/21/starbucks.html](https://sakurity.com/blog/2015/05/21/starbucks.html)

------
buboard
> each of these companies could simply pursue their own independent stored-
> value liability programs. But wouldn't an alliance be better?

Obviously it woudln't. He even provides the evidence why not. People top up
their starbucks because they need coffee every day - it's basically a
subscription , but they dont buy the same stuff at walmart every day - and the
cost levels are widely different. Something similar happens to virtual credits
for different games - Experts will tell you that it is better to have a
separate economy for each game rather than one unified economy - and you
should not even allow players to pay each other. Same reason why stock photo
sites want you to buy credits for each one of them, or why each newspaper
wants a separate subscription. The "Breakage" breaks up when the economies are
unified.

------
afarrell
These and amazon gift cards are indeed a medium of exchange.

~~~
arafa
They can also be used for money laundering, as a result.

~~~
gruez
How would you launder money with starbucks cards? Sure, you can transfer
balances with them, but that alone doesn't help you launder money.

According to the treasury dept:

>First, the illegitimate funds are furtively introduced into the legitimate
financial system. Then, the money is moved around to create confusion,
sometimes by wiring or transferring through numerous accounts. Finally, it is
integrated into the financial system through additional transactions until the
"dirty money" appears "clean".

I don't see how starbucks cards can be used in any of those steps.

~~~
ska
Basically anything that is directly exchangeable for cash or useful goods and
services is useful for money laundering, I would imagine.

If you can fill one with stolen CC details and then either cash out in a store
or sell for a discount, that's a pretty basic launder, no?

~~~
drewg123
Being able to cash out a gift card seems like an interesting way to get a cash
advance on your credit card, without paying cash advance fees. Surely the
credit card companies are on to this, and prevent it somehow?

~~~
gruez
There's a list of goods[1] that are classified as "cash-like" and are treated
like cash advances when you purchase them. They don't really try too hard to
crack down on this though, because there's little point. After all, you can
always get a cash advance for free by going into a store and offer to pay for
someone's purchase in exchange for cash (and a little discount).

[1]
[https://help.barclaycard.co.uk/brochure/spending_transaction...](https://help.barclaycard.co.uk/brochure/spending_transactions/cash-
like-transactions)

------
crazygringo
It's always annoyed me that buying a Starbucks coffee through their app (to
skip the line) requires pre-loading a virtual card from your credit card,
_minimum $10_ even if it's for just a $2.50 coffee.

Unlike most other apps (e.g. McDonald's) that simply run each transaction
through Apple Pay.

Just by virtue of using the app, I'll always have some leftover money
Starbucks will one day keep. (I'm not aware of any way to revert a balance
back to cash.)

~~~
tomjakubowski
> (I'm not aware of any way to revert a balance back to cash.)

If you can get the balance under $10 and stop at a store in California,
they'll exchange it for cash.

[https://www.dca.ca.gov/publications/legal_guides/s_11.shtml](https://www.dca.ca.gov/publications/legal_guides/s_11.shtml)

------
notatoad
>Since each credit card payment will cost Starbucks 1-2% in interchange fees
paid to the card networks and banks, the company saves a lot of money by
guiding customers to its payments app.

i'm not sure this is true. they're definitely saving something on the
interchange, but not 1-2%. reloading your starbucks card is done by a credit
card payment, so they're still paying that percentage fee one way or another.

~~~
benmanns
Yeah the savings would be on the flat rate (Stripe charges $0.30, who knows
that Starbucks pays). Grocery stores, convenience stores, etc, are also not
selling Starbucks gift cards for free.

------
sudhirj
Shameless plug, If anyone’s building one of these cards, I made a wallet
microservice
([https://github.com/sudhirj/notecase](https://github.com/sudhirj/notecase))
for a movie ticket site I work on (justickets.in)

It’ll let you track recharges, spends and balances for your customers, we use
it for nearly a million customers.

~~~
sudhirj
Docs are here
[https://notecase.docs.apiary.io](https://notecase.docs.apiary.io)

------
js2
Just today, I uncovered an old gift card from a dept store called Rich's,
which apparently became part of Macy's. I have no idea how old the card is,
but it has a year 2000 logo on it.

The card has a 800 number on it to check its status. So I called it and
entered the card number. It was unrecognized. :-(

It was probably a $50 holiday gift to me at some point.

I wonder whose pocket that money ended up in?

What a racket gift cards are.

------
foota
The best way to go about this is to use your credit card to reload your
starbucks balance, get points on the card and from the starbucks purchase.

Relatedly they've tried to sell me on the starbucks credit card but it's a
1-2% difference in rewards. (nto that I spend quite enough on coffee for it to
come out to much, but it's the theory of it that's fun)

------
anonu
My Starbucks app is still linked to my credit card. So they must still pay the
interchange fee...

Also why would Starbucks form an alliance with McDonald's? They compete in the
same market. They both sell coffee and breakfast sandwiches... Would be a bad
idea for sbux.

------
tomrod
Yep -- Starbucks and similar typically hold these in big banks, who pay
interest on the deposits.

They're called "brokered deposits" in finance, and they have all kinds of
restrictions. Banks like them because they have predictable stability to lend
against.

------
Scoundreller
Canadien income tax law lets you give 2 tax-free gifts of up to $500 value.
Can’t be cash.

So, smart employers will celebrate the new year and some other random holiday
with $500 in gift cards.

------
andy_ppp
Yes, they also dodge tax in dastardly ways and as such I'd rather not be one
of their users.

